To finance higher studies, we may have to take a loan. International students especially have a lot more to consider when it comes to expenses than their counterparts studying in India. In addition to paying an exorbitant tuition fee, these students have to set aside extra money for travel, housing, and study overseas. And thus, in the same accordance, section 80E of the Income Tax Act was introduced in the Income-tax Act of 1961 to provide relief to taxpayers incurring high education expenses and needing to avail loan to meet such fancy expenditures.
In this article, we will explain the tax deduction under Section 80E. Furthermore, you can utilize this section to avail Tax benefits available for education loans.
Section 80E of Income Tax act provides a deduction regarding interest on education loans taken for higher education. The loan taken for higher education would include the following significant expenses :
1. Tuition fees for the course proposed
2. Travel expenses (applicable especially in case of courses outside India)
3. Expenses towards Lodging
4. Expenses towards Study material and instruments like a laptop which may be mandatory for the course
In short, an Education loan is a cost-effective tool to support the students’ higher education. Most of the banks and financial institutions provide educational loans. In addition, one can claim a deduction of interest on an Educational Loan in his Income Tax Return Section 80E Deduction on an Education Loan.
An individual who has taken a higher education loan and paid interest on the same can claim the deduction under this section. A HUF, company, trust, or partnership firm cannot claim it. Till FY 2006-07, the deduction under 80E was limited to the loan taken by the assessee himself. However, it was modified to also apply to loans taken:
- For self
- For Spouse
- For children of the assessee, including adopted children
- For any student for whom the assessee is the legal guardian
Although the loan can be availed for the individual’s education or relative, the deduction can be claimed only by the individual who has availed the loan for this purpose and is responsible for repaying the same out of his income.
Sec 80E provides a deduction in respect to loans taken for higher education. It may be noted that the section applies to ‘higher education and not on any loan taken for school admissions. The conditions for the same are as follows:
- After completing the Class 12 Examination, the courses should be opted for like Senior Secondary or its equivalent.
- The university/board should be approved by the local authority or the state or central government.
- The deduction under Section 80E can be availed only for full-time courses.
- Loans taken for postgraduate courses in medicine, management, engineering, applied science, etc., are covered under Section 80E. However, loans taken for part-time courses are not included under Section 80E.
- It covers vocational courses taken up after the completion of the senior secondary examination.
- Courses undertaken outside India also fall under the purview of ‘higher education if taken up after completing the senior secondary examination.
The tax deduction available under Section 80E is applied only to education loans from banks, financial institutions notified under the Income Tax Act and approved charitable institutions. You cannot claim a tax deduction on funds borrowed from family members or friends for higher education.
Similarly, not all NBFC education loans will qualify for a tax deduction. Only those education loans availed from NBFCs notified by the central government through the official Gazette as a ‘Financial Institution’ for education loan tax deduction will qualify for the removal. This is especially relevant as banks are increasingly getting cautious with education loans due to the rising non-performing assets in the segment. Since the NBFCs are aggressively pushing to fill this gap, students may get education loans from NBFCs with relative ease. Hence, to ensure that you do not miss out on the Section 80E tax deduction later, check out whether that NBFC has been notified as such through the official Gazette.
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The deduction under Section 80E is the interest paid on an education loan. Thus, there is no cap or upper deduction of 80e limit on the amount of interest that can be claimed as a deduction. In the financial year, the deduction is available to the extent of interest paid on loans for higher education. In addition, a deduction is available irrespective of the interest rate charged. Therefore, the deduction under Section 80E can be availed regardless of the loan amount.
Please note that the principal component does not qualify for tax deduction u/s 80E. Only the interest component of education loan EMI qualifies for tax deduction under Section 80E. The lack of tax deduction for principal repayment in education loans has been somewhat compensated by the absence of an upper cap claiming a tax deduction on interest payment.
Deduction of interest on education loan can be claimed for –
- 8 years, from the year in which the repayment of the loan is started
- The period up to which repayment of interest is made, whichever is earlier. It means the tax benefit can be taken for a maximum period of 8 years.
Eight years starts from the year in which repayment of the loan is started. Thus, the Date of obtaining a loan is not relevant.
If you’re planning to take out a loan to finance your education, you can consider claiming a deduction under section 80E of the Income Tax Act 1961.