Income tax deduction for Education Loan (Section 80E)

An education loan is generally taken for the purpose of funding a child’s education. But that’s not the only purpose that it serves.
An education loan can also be one of your weapons to save some taxes, thanks to the section 80E of Income Tax Act, 1961.
Let’s dive deeper and have a look at how it works.

First of all, let’s look at the components of a loan and whether the exemption benefits are applicable for all components :

Section 80E
Components of a Loan

 

So clearly, the exemption benefit is only for the interest part, and not the principal part.
So now that you know the basics about Section 80E, let’s head to some FAQs.

Who can avail the benefits under Section 80E?

The deduction can be availed by the individual himself/herself as well as for loans taken for :

  • Spouse
  • Children
  • Anyone else to whom the individual is a legal guardian to.

Is any education loan sufficient to avail the benefits?

No, the deduction can be availed only for education loans taken for higher studies within and outside India. It is not applicable for any other purposes.

Example: If you take a loan for your son who is going to study in the UK after his 12th, you can easily avail the benefits.
However, if you have taken this loan for his tuition classes fees, then you cannot avail the benefits.

Is there any limit on the maximum amount that can be claimed?

Good news for you, there’s no maximum limit on the amount that can be claimed.

Can the loan be taken from anyone?

No, the loan must have been taken from a registered or charitable financial institution. If it is taken from an individual such as a friend or relative, no benefits can be availed.

So, if you take the education loan from SBI or any other well-known bank, you can easily avail the benefits.

But if you take it from a childhood friend of yours, you cannot avail any benefits.

How long can the benefit be availed?

The benefit can be availed for a maximum of eight years from the date of the loan being sanctioned.

Example: If the repayment period is less than 8 years, the benefit can be availed for the total period.
But if the repayment period is of more than 8 years, it can be availed till the 8th year, and after that, no benefits will be available.

Here’s a flowchart for the better understanding of this :

Section 80E benefits
Benefits Eligibility
Real life example :

Mr. Ravi has taken a loan of Rs. 10 lakh from a leading bank to fund his son’s MBA in the United Kingdom. The rate of interest for the loan is 10% pa, so the net interest comes out to be Rs. 1 lakh per year.

This implies :

  • The tax benefits will be applicable only on the interest portion i.e. Rs. 1 lakh part.
    In no year will the benefit exceed this amount or be applicable to the principal part i.e. Rs. 10 lakh.
  • The benefits can be availed only by Mr. Ravi himself, or his spouse, for their son. The benefits cannot be availed by both of them.
  • The benefits can be availed by them for a maximum of 8 years, and not more than that.

That’s all about Section 80E! Follow us for more such blogs.

Legal Text :

Section 80E

Deduction in respect of interest on loan taken for higher education. 80E.

(1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, any amount paid by him in the previous year, out of his income chargeable to tax, by way of interest on loan taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education or for the purpose of higher education of his relative.

(2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest referred to in sub-section (1) is paid by the assessee in full, whichever is earlier.

(3) For the purposes of this section,—

(a)  “approved charitable institution” means an institution specified in, or, as the case may be, an institution established for charitable purposes and approved by the prescribed authority under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G;

(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 recognised by the Central Government or State Government or local authority or by any other authority authorised by the Central Government or State Government or local authority to do so;

(d)  “initial assessment year” means the assessment year relevant to the previous year, in which the assessee starts paying the interest on the loan;

(e)  “relative”, in relation to an individual, means the spouse and children of that individual or the student for whom the individual is the legal guardian.

Source : Income Tax India. (2018). Section 80E [online] Available at: https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx [Accessed 20 May 2018].