Introduction
Education is one of the most vital investments that a person makes for his or her future. However, the cost of higher education in India and abroad has only been on the rise. Therefore, most individuals and families cannot afford the high cost of higher education. This gap between the cost of education and available funds has led to education loans becoming the norm. In India, education loans provide relief in terms of finance, and another benefit is available under Section 80E of the Income Tax Act. This section provides substantial tax deductions, which helps individuals to better manage the financial burden of education loans. Let’s dive deeper into the tax benefits available under Section 80E and explore how this provision can be a useful tool in managing education-related finances.
Understanding Section 80E of the Income Tax Act
Section 80E of the Income Tax Act, 1961, provides a tax deduction on the interest paid on education loans. The purpose of this provision is to make it easier for individuals to repay loans taken for higher education by offering a reduction in their taxable income. The important point from this section is that the interest paid can be allowed as a deduction, but that is only against the interest part of the loan. For individuals, who are subjected to paying the education loan amount, this brings much relief since it reduces their overall tax burden.
Eligibility to Receive the Tax Advantage
In order to qualify for the tax benefits under Section 80E, one needs to meet the following conditions:
- The Borrower:
The borrower who has borrowed the loan is eligible to claim the deduction. The borrower could be the student who has taken the loan for his or her education or the parent/legal guardian of the student. - Loan for Higher Education:
The education loan has to be for higher education. Higher education refers to post-secondary education, like undergraduate, postgraduate, or professional courses. This can be a degree, diploma, or certificate course from a recognized institution. The loan has to be for full-time education. - Recognized Educational Institutions:
It should be for studies at a recognized educational institution, whether in India or abroad. That is, if the course or the institution is not recognized, loan claims will not benefit from tax exemptions under Section 80E. - Eligibility to Claim Deductions:
The deduction under Section 80E can be claimed only by the individual who is repaying the loan, not by any other co-borrower or relative. However, if the loan is repaid jointly, the tax deduction can be claimed by the person who is making the payments. - Interest Payment on the Loan:
The deduction applies solely to the interest component of the education loan. Repayment of the principal amount is not eligible for any tax benefit under this section.
Key Features of Section 80E
Section 80E provides a range of benefits that make education loans more manageable. Here are some key features that highlight its advantages:
- No Upper Limit on the Loan Amount:
Unlike other tax deductions, there is no upper limit on loan amount under Section 80E. This is especially beneficial for those who have availed of large loans to finance expensive education. The deduction is based on the actual amount of interest paid and there is no restriction on the quantum of the loan itself. - Interest Paid Deduction Only:
One of the primary advantages of this section is that it only applies to the interest paid on the loan and not the principal repayment. Since the interest component is generally higher in the initial years of the loan, this provides significant tax relief during the early repayment phase. - Duration of Deduction:
The deduction under section 80E is available only for a maximum of eight years, or till when the loan has been repaid, whichever has been earlier in time. Meaning, if paid back within lesser time, say five years or so, only for that length of time it will be available in terms of tax savings. Conversely, it would be restricted to the former eight years duration if the loans are repaid after eight years. - Loans Taken for the Taxpayer’s Own Education or for Any Other Dependents:
This includes loans taken for the education of the borrower himself or herself, his or her spouse, children, or any other dependent for whom the taxpayer is a legal guardian. This can be used in case the taxpayer is funding someone else’s education. - Eligible Financial Institutions to Provide Loans:
Section 80E is allowable for loans provided by any recognized institute, be it a bank or Non-Banking Financial Company (NBFC) or for that matter charity institutions. Provided that the loan is received for higher study, there can be no other restrictions on which institution is funding the loan for education. - Subject to Education Within India and Worldwide:
This provision is yet another benefit wherein loans taken for education purposes within India or even abroad are applicable. Many students prefer to go abroad for education and the cost of education abroad is usually much more. Under Section 80E, tax deductions available to those taking loans for funding international education is just as valid as that to those studying within India.
Calculation of Tax Deduction
Let us assume that an individual has taken an education loan of ₹10 lakh and the interest rate prevailing for the same is 8% per annum. The amount of interest for the first year would be ₹80,000. As per Section 80E, this entire amount can be claimed as a tax deduction.
For the next twelve months, since the interest pays ₹80,000, the entire ₹80,000 can once again be written off. Since this is interest, it should be written off for a total of eight years or until its payment, which ever is earliest.
It is important to note that the amount of deduction would be modified if the interest amount was to change due to a variation in interest rates or repayment schedule for that particular year.
Additional Benefits of Section 80E
- Incentivises Investment in Education:
Section 80E is a motivator for higher education. It reduces the financial burden involved in pursuing a higher education course. It would help people more to concentrate on the education rather than the burden of high-interest repayment. - Reduces Taxable Income:
Claiming the deduction on interest paid on education loans can lower taxable income, thereby reducing total tax liability for that fiscal. This is particularly helpful during years when the interest component of the loan is higher. - Better Financial Planning:
With such an advantage of spreading interest deductions over years, it allows taxpayers to better manage their funds, especially during early years of repayment when the burden of interest is much more intense. Borrowers get a smoother financial planning for the time with lower taxable income. - Support Education for Future Generations:
Section 80E not only benefits the students but also helps parents or guardians who take loans to finance the education of their children. It provides tax relief to families, enabling them to support the education of the next generation without excessive financial strain. - Appealing for Higher Loan Amounts:
Thus, the tax advantage under Section 80E is bound to make greater education loans that much more alluring when in need, mainly because of a substantial tax saving, especially for the initial few years of loan repayment.
Key Take Aways
- Tax Benefit on Only Interest Repayment
Even though only interest repayment on education loan qualifies under Section 80E, repayment of principal will not have a tax advantage. - Only Interest Paid on the Loan is Eligible for Deduction:
Only the interest amount on the loan is eligible for a deduction and not the total loan amount. - Capped at 8 Years :
The deduction is available for a maximum of 8 years, after which no further tax benefits can be claimed. If the loan is repaid before the 8-year period, the deduction stops once the loan is cleared. - Loan Taken for a Recognized Course:
The course through which the loan is taken needs to be registered with the government or a well-recognized body for education. Any unrecognized course makes the tax relief unavailable. - Verification Process of Documents:
All documents that are in regard to the loan, which would include loan agreement, receipts of payment, and an interest certificate received from the financial institution, will have to be preserved because all of these are necessary when claiming tax deductions.
Conclusion
The income tax benefits, particularly from section 80E, make education loan repayment extremely beneficial financially. The ability to claim a deduction on the interest paid during the repayment period reduces the overall tax liability, making it easier for the borrowers to handle their finances. The provision can be applied both to domestic and international education loans, making it versatile and useful for a wide range of people pursuing higher education. This will increase the investments in education, thereby reducing taxable income and offering much-needed relief to the students and their families.
Section 80E of the income tax act can be claimed in case you are repaying an education loan. Proper claiming of this benefit will have to be made with regard to the eligibility criteria and the proper documentation requirements to be followed so that the relief under this provision can be maximized.
