Monday, 5 May 2014

Education Loan: Income Tax Deductions Under Section 80E

An education loan can not only fund your higher studies but also help save tax. The interest paid on the education loan can be claimed as deduction, as per Section 80E of the Income Tax Act, 1961.

Top 10 Things to Know:

  • The income tax benefit can only be claimed on interest part of the loan. The principal part does not qualify for tax benefit.
  • However, the entire interest part of the loans repaid can be deducted while calculating your taxable income. There is no upper limit for grant of deduction in respect of interest on loan for higher education. Also, there is no upper limit of the rate of interest which will be allowed as a deduction.
  • An individual can avail of tax benefit if he/she has taken an education loan to support higher studies of self, spouse, children or for the student of he/she is the legal guardian. So education loan taken for siblings or other relatives don't qualify for Section 80E benefit.
  • Remember, deduction can be claimed by an individual only if the loan has been taken in his/her name.
  • This special deduction is also allowed even for education loan availed for study abroad.
  • This tax deduction is allowed only if the education loan has been availed from any bank or notified financial institution or any approved charitable institution. So no deduction under Section 80E would be available if the education loan is taken from employer, family or friends.
  • Under the earlier provisions, the deduction on education loan was available only for pursuing full time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics. However, the list has been expanded to even include vocational studies now. It now covers "all fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so".
  • The deduction on education can be claimed only when you start the repayment and is available up to eight years, or until the payment of interest in full, whichever is earlier. This means, if you repay the loan within, say, five years, you can claim deduction only till such period.
  • Most education loans come with a moratorium period during which you opt not to service the loan. This period is usually until one year after the completion of the course or six months after the student gets a job, whichever is earlier. Accrued interest during the moratorium gets added to the principal and repayment in EMIs gets fixed. If you opt to pay interest during the moratorium period, it gets included while calculating the time limit of eight years.
  • To avail tax benefits on education loan, inform your company's HR/accounts department so that less TDS is deducted from your salary. Else, you can claim it by filing tax returns.

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