Education Loan Tax Benefits under section 80E Deduction

India has officially taken the crown as the most populated country in the world. According to a recent Bloomberg report, India now boasts over 1.417 billion people. But that's not all - India also has the largest population of 5–24-year-olds, with a median age of 28.4 years. It's no wonder that the education industry in India is booming and is set to become a huge market in the near future. A 2021 report by IBEF suggests that the education industry in India is estimated to be worth about Rs. 9.6 Lakh Crores in FY20 and is expected to grow to about Rs. 18 Lakh Crores by FY25.As the education sector grows, so does the spending on education. Education expenses have become a significant part of a middle-class Indian household's budget, with education loans becoming a common way to fund higher education costs. The government recognized the importance of education and to help people cope with the rising costs, introduced a tax deduction on education loans under Section 80E of the Income Tax Act, 1961. This deduction helps individuals with an education loan by reducing their tax liability if they meet certain criteria.So, if you're planning to claim a tax deduction on an education loan, here are the top 5 things you need to know!

Did you know that the tax deduction under Section 80E is exclusively available to individuals who have taken an education loan ? Unfortunately, this benefit is not available to HUF or any other kind of taxpayer . However, if you are an individual who has taken an education loan for yourself, your spouse, your children, or someone for whom you are the legal guardian, you could be eligible for this deduction.It's important to note that education loans taken for siblings or any other relatives do not qualify for this deduction. Additionally, only the individual who has taken the education loan either for themselves, their spouse, their legal ward, or their children can claim this deduction. If the education loan is a joint loan, both parties can qualify to claim the deduction.

The tax deduction under Section 80E is only available on loans taken up to pursue higher education? Higher education, in this case, is defined as any full-time studies pursued after passing the Senior Secondary Examination (SSE) or its equivalent exam from educational institutes, boards, or universities recognised by the government or local authorities. These studies can be regular or vocational, and the tax benefit is available for studies pursued in India or abroad.

The most important thing to know about the tax deduction benefit for education loans is that the deduction is only available for the interest component of the education loan. The deduction available is equal to the interest component of the total EMIs paid towards the loan repayment in a particular financial year. However, there is no limit on the maximum interest amount you can claim under Section 80E.The individual who wishes to make the claim needs to obtain a certificate from the institution from which the loan is obtained that segregates the Interest Component and the Principal Component of the Loan paid by them in the financial year. The amount in the Interest component will be allowed to be deducted from the overall income. Also Read: Everything You Need To Know About Section 80EE Income Tax Deduction

Section 80E allows tax deductions for the interest paid on education loans that are availed from banks, financial institutions notified under the Income Tax Act, and approved charitable institutions only. Loans taken from anywhere else like friends and family do not qualify for such a deduction.However, it should also be noted that even loans taken from any financial institution (including NBFCs) will qualify for the tax deduction. A person who has taken an education loan from an NBFC (Non-Banking Financial Company) that is recognized as a Financial Institution by the central government in the official gazette for the purpose of education loan tax deduction will only be eligible to claim such deduction. So it is necessary that one checks out whether the NBFC is a recognised financial institution by the government or not before taking up an education loan so that they do not miss out on claiming the tax deduction .

The duration of an education loan can go up for longer periods even up to 15 years in some cases. The deduction towards the interest of the education loan can be claimed from the year in which the repayment of the loan begins. But the deduction is only available for 8 years beginning from the year you start the repayment of the loan. If the interest of the loan is paid earlier i.e. before 8 years, then the deduction will be available till such period.For example, if the loan duration is of 7 years, then the tax deduction will be available to be claimed for 7 years only instead of 8. In other case, if the duration of the loan is of 15 years, the tax deduction will be available for 8 years only and not till 15 years. So it would obviously be logical to pay an education loan within 8 years to get the full benefit of the tax deduction.

Now let’s understand all of this with an example:

Yash, a 46-year-old salaried individual residing in Bangalore with his family, is facing the daunting task of financing his daughter's higher education. His 18-year-old daughter wishes to pursue Computer Engineering at a prestigious university in India, but Yash is unable to cover the tuition fees from his regular budget. To resolve this issue, he decides to take out an education loan of Rs. 12 Lakh for a period of 8 years.Fortunately, Yash discovers an NBFC recognised by the government as an approved financial institution for education loans and obtains the loan for the amount specified. This education loan has enabled his daughter to pursue higher education at the university of her choice, and Yash can claim a tax deduction for the interest he pays towards the loan. There is no limit on the amount he can claim as a tax deduction for the education loan's interest. Moreover, as the loan duration is eight years, Yash will be able to claim the full deduction on the interest, thereby reducing his taxable income.By utilising the tax deduction under Section 80E of the Income Tax Act, Yash will be able to ease the financial burden of funding his daughter's higher education. With the rising costs of education, many families are turning to education loans, and this tax deduction provides a significant benefit for them. Frequently Asked Questions

How to find out the interest paid towards the education loan to make a tax claim under Section 80E?

You can obtain a certificate from the bank or the institution that you have borrowed the loan from that breaks down the EMI amount into the payment toward interest and payment toward principal repayment. Such a certificate will also be necessary while claiming the tax deduction while filing your ITR .

I have taken up an education loan for my brother. Will I be able to claim a deduction under Section 80E?

Section 80E deduction is not allowed on education loans that are taken by an individual for the higher education of their siblings. However, if you are a legal guardian to your brother and your brother is your legal ward and you have a document to prove the same, you will be able to claim the deduction under Section 80E.

Is there any way I can claim a deduction for the principal amount of the education loan?

Unfortunately, Income Tax Act doesn’t allow individuals to claim a tax deduction for the principal repayment made for education loans. Only the interest component is allowed. Plus you can’t make changes to the interest amount as you need to submit a certificate that breaks up your EMI into interest amount and principal amount.

I am planning to avail an education loan for my son who wants to pursue higher studies in abroad. What things should I be aware of?

If you are planning to avail an education loan for the pursuit of higher education for your son, you need to make sure that the institution that you will borrow the education loan from is a recognised financial institution by the central government. This is necessary to be eligible for claiming such a deduction. Another thing to note is that the higher education is being availed after passing SSE or any other equivalent examination.And the last thing to note is to design the repayment of the education loan in such a way that the maximum benefit of Section 80E can be availed. So let’s say you plan the EMI in such a way that the repayment is completed after 10 years, then you will not be able to claim the deduction for the last 2 years. So, if your budget allows you to pay a little higher amount of EMI, you can set the repayment duration of the loan in 8 years.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.