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The cost of getting a higher education in India is increasing by the day. And if we were to go abroad to seek higher education at a foreign university, we have to empty most of our savings in this pursuit. If we don’t have that kind of bank balance, we fall back on education loans to fulfil our dreams of higher education at a foreign university. This loan has to be repaid, and the interest added to the principal causes the monthly EMIs to go higher — making an already difficult student life all the more challenging. So, in this case, what should you do?
Those who have taken an educational loan to seek higher education at a foreign university abroad can seek tax deductions under Section 80E of the Income Tax Act, 1961.
The Section 80E of the Income Tax Act, 1961 states that if a taxpayer, also known as the assessee, has taken an education loan to finance their higher education at a foreign university abroad for self, spouse, children including adopted children or for a student of whom they are a legal guardian, can claim deductions in taxation on the interest paid towards the loan.
An education loan, taken for higher studies abroad, not just includes the tuition fees of the proposed courses, but it also includes the travel expense, lodging expenses at the institution and expenses towards study materials and other instruments, such as a laptop, that may be compulsory for the course.
Section 80E identifies the education loan as a whole and provides 80 E deductions on the interest paid towards the principal.
Note: Section 80C allows tax deductions on the tuition fee payment for higher education abroad. On the other hand, Sec 80E of Income Tax Act allows for tax deductions only on the payment of interest towards the education loan for higher education abroad.
Note: The Section 80E deductions do not apply to the principal component of the education loan.
The individual taxpayer or assessee can claim tax deductions on education loan taken for:
There is no maximum limit on the tax benefit amount under Section 80E. However, the benefits can only be availed on the payment of interest towards the principal amount. 80E deductions can be availed from the year the assessee starts paying the interest.
Banks usually provide a one year moratorium period to the borrower from the date of completion of the course to begin the repayment process. Therefore, one can begin to claim deductions from the time they start to pay the interest amount of the loan.
Important points to note are:
If the loan is repaid, for instance, within five years, then the assessee can claim for deductions only for those five years. Once the amount is repaid in full, they cannot claim for any further deductions even though the eight years are still let to complete.
For example, if your total taxable income is ₹7 lakhs and you are repaying an interest portion of ₹3 lakhs per annum, then your total taxable income would be ₹4 lakhs.
This depends from individual to individual. Some taxpayers use the entire quota of eight years to avail the tax benefit and to invest their surplus capital in other investment instruments and gain profits during that period.
Others, however, plan to repay the amount at the earliest and become debt-free. You can choose the approach which suits you the best. Either way, you will be able to avail tax benefits until you repay the amount in full.
However, beyond eight years, these benefits are not applicable.
The taxpayer is eligible for tax benefit under Section 80E over and above the other tax benefits under relevant sections under Chapter VI A of the Income Tax Act.
Therefore, even after availing the maximum ₹1.5 lakhs tax benefit under Section 80C, the taxpayer can further claim tax benefits under Section 80E.
The individual taxpayer who has taken an education loan to finance the higher education for self, spouse, their children, including adopted children, and students for whom they are legal guardians, can avail tax benefits under Section 80E.
HUF (Hindu undivided Families) and companies do not qualify for tax benefits under Section 80E. Also, a loan taken from relatives or friends does not qualify for tax deductions under 80E.
There is no maximum limit on the amount that could be claimed for tax benefits under Section 80E. The deduction is applicable only on the interest portion of the loan. Therefore, one can claim deductions regardless of the interest amount.
You will be able to repay the loan even after the eight years. However, you will no longer be eligible to avail the tax benefits under Section 80E.
The education loan should be taken from banks or financial institutions registered under the Banking Regulations Act 1949, or from charitable trusts approved under Clause 23C of Section 10. A loan from relatives, friends and unauthorised sources do not qualify for 80E deductions.
Section 80E is a wonderful option to save some extra money from the tax ambit. Every individual taxpayer who is paying for the education loan should take advantage of this tax-saving benefit.
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