Section 80E allows deduction in respect of repayment of interest on loan taken from any financial institution or any approved charitable institution for higher education for the purpose of pursuing his higher education or for the purpose of higher education of his spouse or his children or the student for whom he is the legal guardian.
The deduction shall be allowed in computing the total income for the Financial year in which the employee starts repaying the interest on the loan was taken and immediately succeeding seven Financial years or until the Financial year the interest is paid in full by the taxpayer, whichever is earlier.
For the purpose of this section –
(a) “approved charitable institution” means an institution established for charitable purposes and approved by the prescribed authority section 10(23C), or an institution referred to in Section 80G(2)(a);
(b) “financial institution” means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf;
(c) “higher education” means any course of study 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;
Tax Deductions under Section 80E for Education Loans
Education loans are a convenient and popular option for many, to meet the cost of higher education. Did you also know that under Section 80E of the Income Tax Act, repayment of this education loan could be used to claim a deduction? Read on to find out, what this section offers and how to utilize it to your benefit.
Deduction in Respect to Repayment of Education Loan
If you have taken an education loan from any financial institution or an approved charitable institution, Section 80E provides a tax deduction on the loan interest that you are paying.
Who is Eligible?
Individual assesses only. So, if you are part of an HUF, this deduction cannot be claimed by you.
The entire interest paid on the education loan could be used to claim a deduction. There is no cap on the deduction amount. However, one needs to remember, that there is no tax benefit on the principal repayment of the loan.
Scope of Deduction
The loan should be taken for the sole purpose of higher education. It could either be for the individual, spouse or children. Loans for the higher education of siblings, in-laws, nephew or niece, will not qualify for any deduction. Also, from assessment year 2010-11, deduction could be claimed for the student for whom the individual or assessee is the legal guardian.
The education loan should be taken from either a financial institution or an approved charitable trust. Loans taken from friends, employer or relatives do not qualify for a deduction.
Courses Eligible for Deduction
From assessment year 2010-11, the government has extended the benefit in Section 80E to all streams of studies including regular courses as well as vocational courses, pursued after passing the Senior Secondary Examination from a recognized Board.
Education Loans taken for full time courses only are eligible. Any graduate course (as mentioned above), or, post-graduate courses in engineering, medicine, management, applied sciences, mathematics or statistics are considered for a deduction. No deduction is available for part-time courses.
The deduction is available for a total of eight years or till the principal and interest amount have been repaid, whichever comes earlier. This eight years would include the year in which the loan repayment starts and seven years following this year. So even if your loan tenure exceeds these eight years, no deductions can be claimed beyond this.
Key Factors to Keep in Mind
a) Loan should be in the name of individual claiming deduction. No deduction can be claimed for loans in the name of parents, spouse or sibling; even if the loan was taken for your studies.
b) The course need not be pursued in India. Loans for overseas courses are also permissible for a deduction.
c) Deduction would be applicable only when the individual starts repaying the loan.
A final word…
The benefit under section 80E is over and above the tax benefits under section 80C. So if you have utilized your limit under section 80C, this could be a further opportunity to reduce your tax outgo.