An education loan makes it possible for you the finances and flexibility to take up greater education and spend for it systematically more than a longer period. At the very same time, it provides you tax breaks that make the repayment significantly less high priced. However, there are some caveats involved in availing these positive aspects. Understand the tax exemptions obtainable with the education loan and how to make most effective use of them.
You can claim tax deductions against education loans beneath Section 80E of the Income Tax Act. However, there are a couple of points to hold in thoughts about tax deductions on education loans.
The very first point is that even though there is no upper limit on the quantity you can claim, you can claim tax positive aspects only on the interest paid on the education loan and not on the principal.
Second, only the individual availing the loan can claim deductions. Education loans want not be taken by the student themselves. You can take a loan for your children or your spouse. So, “if you take an education loan for your daughter and repay it, you can claim the tax deduction. However, if your daughter repays the loan from her source of income after she starts earning herself, neither you nor she can claim deductions. This is because the loan is in your name, but the repayment is not made out of your taxable income. Simply put, if the borrower wants to claim tax benefit, they must ensure the EMIs go from their accounts,” says Adhil Shetty, CEO, BankBazaar.com.
Bear in thoughts that some institutions would let you to take an education loan to fund your sibling or cousins’ greater research. However, unless you are their legal guardian, you can not claim tax deductions on the loan.
Third, not all education loans are eligible for tax exemptions. “Section 80E specifies that only loans from specified financial institutions, including banks and any other financial institution notified by the Central government, are eligible for exemptions. While most leading NBFCs fall in this list, you need to ensure that your loan provider is included in this list if you plan to take a loan from an NBFC. Money borrowed from family, friends, or employers does not fall under the category of education loan and is not liable for exemptions,” informs Shetty.
You can avail deduction for the interest for a maximum of 8 years beginning from the year in which you start out repaying the loan. If your loan tenor exceeds 8 years, then you can not claim a deduction for the interest paid beyond 8 years.
Conclusion
It is clear, hence, that interest paid on educational loans obtained to pursue greater research in India or overseas can be claimed as a deduction from taxable revenue of the person. “The deduction can be claimed starting from the year interest payment commences and ending with loan repayment or 8th year, whichever is earlier. One should note that these loans should be availed from banks/financial institutions/ approved charitable institutions only. Interest paid on loans from friends and relatives for this purpose do not qualify for such deduction. A certificate from the institution would be necessary to support the interest amount paid for claiming a deduction,” says Aarti Raote, Partner, Deloitte India.
It might also be noted that loans obtained for self or spouse, children and legal wards would be permitted for this goal. Higher education has also been defined to imply study pursued following passing the Senior Secondary Examination or its equivalent from any college, board or university recognised by the government.