Tax benefits on education loan

Parents always wish to fulfil their children′s aspirations of pursuing a career goal. But financing the cost of higher education gives them sleepless nights. With the steep rise in the course fees parents are fretting out about arranging for funds. The Indian banking industry has come to the rescue of such parents by granting them higher education loans. Banks are aware that the rewards after the completion of the course would be significant enough for the borrower to repay the loan. Hence it is a win-win situation for both. The Indian tax laws provide an icing on the cake by providing tax benefits which effectively helps to reduce the overall cost of the loan. Under Section 80E of the Income tax act, 1961 the amount paid against education loan interest rate can be claimed as deduction. Here is a complete guide that will help you understand the tax benefit in more detail.
DeductionsThe entire amount of the interest paid on the higher education loan during a financial year can be claimed as a deduction while calculating the taxable income. There is no upper limit on this amount. The principal amount that is repaid does not qualify for this tax benefit.
BeneficiaryOnly those individuals can avail the tax benefits who have taken the education loan for higher studies of self, spouse or children or of a student for whom one is a legal guardian. Education loans taken for siblings or relatives do not qualify for this benefit. One can avail the benefits of tax deductions only if the loan is taken in one′s own name. So if a parent has taken an education loan for MBA for the child then the parent can avail the tax benefit and not the child himself. You can claim the deduction when you take the loan for yourself, your spouse or your children. It is recommended that you do an optimum family tax planning and take the loan in the name of the individual who pays the maximum tax on his income.
InstitutionHigher education loan taken from family, friends or an employer does not qualify for deductions. The tax benefit can be claimed only if the loan is taken from any bank in India, recognized financial institution or an approved charitable institution.
Type of coursesEarlier, deduction on higher education loan could be claimed only if one pursued a full-time graduate or post graduate course in medicine, engineering, management or applied sciences. But now the list covers all fields of studies pursued after passing the Senior secondary examination from a recognized institution in India. Hence an education loan taken for a full time vocational course will also qualify for interest deductions. The course can be done either in India or abroad.
Time periodOne can start claiming the deductions once the repayment of the loan starts. This benefit is available for 8 years or until the full interest is paid, whichever is earlier. The first year begins from the time you start paying the interest on the loan. Usually education loans allow the option to opt for a moratorium period during which one chooses not to service the loan. The accrued interest is added to the principal and the repayments in EMIs are fixed. In such a case the time period will start after the moratorium period when the repayment of the loan starts. However if one chooses to pay the interest portion during the moratorium period it is included in the calculation of the time limit of 8 years. In order to reap the maximum tax benefits on higher education loan you should pay back the loan within 8 years of the initial assessment year.
How to avail the benefitYou are required to obtain a certificate from the bank which segregates the principal and interest payments on the education loan during a particular financial year. When you submit the tax deduction forms you are simply required to mention the total interest amount that you paid and submit the supporting document if required.
So if you decide to take an education loan to fulfil your child′s dreams and aspirations just don′t think about education loan interest rates. Look at the brighter side of repaying the loan amount. The higher education loan not only finances the higher studies but also helps in saving taxes later on.
While now you know about the tax benefits on education loan, one must maintain a good CIBIL score to be able to have access to this credit facility. So before applying for the loan, do obtain your free credit report and assess the status so that the loan does not get rejected and lead to issues with the higher studies of the child