Tax Benefits on Education Loan

One of the most valuable investments one can make in life is an investment in education. However, the cost of getting a higher education is rapidly increasing. While the consumer price inflation has been somewhere between 5% to 6%, the education inflation rate has been around 12%. This means the cost of getting an education can double every 6 or 7 years. Financing higher education has thus become a big challenge for many families. Many turn to education loans to bridge this financial gap. 

However, what many don’t realise is the tax benefit on education loans. This benefit is offered under Section 80E of the Income Tax Act, 1961, and can help ease the repayment burden. Here’s all you need to know about Section 80E, what benefits it offers, who can claim them, and how you can maximise education loan tax savings.

Understanding Education Loan Tax Benefits

The tax benefit on education loans is given under Section 80E of the Income Tax Act. It allows taxpayers to claim deductions on the interest paid towards education loans for themselves, their spouse, their children, or a person for whom the taxpayer is a legal guardian. One can claim this deduction for loans taken for pursuing higher education in India or a foreign country, which also includes vocational courses after senior secondary education. Beginning from the year in which you start repaying the interest, you can claim this deduction for up to eight years, or when the interest is fully repaid, whichever happens first.

A unique feature of Section 80E deduction is that there is no upper limit on the deduction amount, and one can claim as much deduction as the interest paid. Note that the student loan interest deduction is only applicable on the interest paid, and not the principal amount. When you pay your EMIs, only the interest paid will count for Section 80E deduction. Also, since the new tax regime eliminated most deductions, this benefit can only be availed under the old tax regime. 

Also Read: Old Vs New Tax Regime: Which is Better New?

Student Loan Interest Deduction Explained

So, who can claim the student loan interest tax deduction? Here are the eligibility criteria associated with Section 80E deduction:

• Only individual taxpayers can claim the student loan interest deduction. Other entities such as Hindu Undivided Families (HUFs) and businesses cannot claim this deduction.
• The education loan must be taken from a recognised financial institution such as a bank, a charitable organisation, or a Non-Banking Financial Company (NBFC). Loans taken from friends and family do not count.
• The deduction can only be claimed if it was taken for the higher studies of self, spouse, children, or an individual for whom the taxpayer is a legal guardian. 
• Here, higher education refers to studies after one has passed the senior secondary exams or any other equivalent exam, and it includes normal courses as well as vocational courses.
• Higher education may be pursued in India or abroad.
• The taxpayer must follow the old tax regime, Section 80E deduction is not available under the new regime.
• One can claim this deduction for a maximum of 8 years, starting from the year when the interest repayment began.

If you meet the criteria, you can claim a deduction on the interest portion of your EMI without any upper limit. The interest amount paid can be deducted from your taxable income, and you can reduce your overall tax liability.

Steps to Claim Education Loan Tax Benefits

Section 80E combines education loan and tax benefit. You can easily claim the education loan income tax benefit when filing your income tax return. Here’s how:

1. You must first maintain thorough records of the interest paid on your education loan throughout the financial year. Your bank may issue a loan repayment certificate, which you’ll need to support your deduction claim. 
2. While filing your income tax return, you must follow the old tax regime. The old tax regime allows you to claim various deductions under Chapter VI-A, such as Sections 80C, 80D, and 80G. Section 80E for education loan interest is also included here. Unlike Section 80C, where one can claim a maximum deduction of Rs. 1.5 lakh, Section 80E does not impose any upper limit on the amount of interest you can claim as a deduction. 
3. Upload or provide the required documents and certificates to support your claim.
4. To avoid penalties, make sure all information you enter is accurate. Keep your up to date loan interest certificate handy. Also, make sure to e-verify your ITR if you’re filing online.

A tax advisor can be invaluable in claiming education loan tax benefits by ensuring that you maximise your eligible deductions and credits, such as the student loan interest deduction. They possess the expertise to navigate complex tax codes and identify all applicable benefits, helping you to accurately report your expenses and avoid potential pitfalls. 

By staying updated on the latest tax laws and regulations, a tax advisor can provide tailored advice, optimise your tax returns, and potentially reduce your overall tax liability. Their guidance can streamline the process, saving you time and potentially significant amounts of money.

Also Read: Tax Avoidance vs Tax Evasion vs Tax Planning? Key Differences

Maximising Tax Savings with Education Loans

Section 80E deduction is only available for 8 years, or until the interest is fully repaid, whichever comes first. This means you can claim the education loan income tax benefit for a maximum of eight years starting from the year you begin repaying the interest, but if you repay the loan earlier, the deduction will only be available for the period of repayment. For example, if you pay off the entire student loan within 5 years, you won’t be able to claim any deductions beyond that. 

One can make the most of this education loan income tax rebate, but it can be tricky. If you use the entire 8 years to repay your loans, you can benefit from the tax deductions on the interest paid for the full eight years. In doing so, however, you will also be prolonging the period during which you carry the loan. That’s why a balance must be found, and it depends on your financial situation, goals, and risk tolerance. 

If you think you can earn a higher return by investing the surplus funds rather than using them to repay the loan, you should make use of the entire 8 year period. But if you value a good credit track record or don’t want the burden of debt hanging over your head, it would be better to pay off the loan as soon as possible. A good credit track record will also allow you to get larger loans and lower interest rates down the line. 

Also Read: Benefits of Tax Planning in 2024

Conclusion

The tax benefit on education loans under Section 80E can help you get some relief from the ever-rising cost of higher education. This deduction is the government’s way to encourage individuals to pursue higher studies and make higher education more accessible and affordable to everyone. So if you are planning your children’s higher education or maybe thinking about pursuing higher studies yourself, taking full advantage of Section 80E is important. Remember that you can only claim this deduction on the interest component of your EMI, and only under the old tax regime. 

FAQs on Tax Benefits on Education Loan

Can I claim a deduction for the principal as well as the interest amount of the EMI that I am paying for an education loan under 80E?

No, Section 80E does not allow you to claim a deduction on the principal amount. One can only claim a deduction on the interest paid towards education loans. However, a big advantage of tax benefits on education loans is that there is no upper limit on the amount you can claim.

How much amount can I claim as a deduction under this section?

Under Section 80E there is no upper limit on the deduction amount for interest paid on education loans. If you pay an annual interest amount of Rs. 3 lakh on your student loan, Rs. 3 lakh can be simply deducted from your taxable income. However, this is only applicable to the interest paid and not the full EMI amount.

I want to avail higher education loans for my child who is going to study abroad. So can I get a deduction under 80E?

Yes, Section 80E allows you to claim a deduction on the interest paid for education loans taken for higher studies in India or abroad.