Education from a prestigious institution is a dream of every aspiring professional. But the cost of education in the present age, especially in the esteemed institutions is beyond the means of many. Leave alone thousands, in recent times the cost has rolled over into lakhs per annum including boarding and lodging.
Deductions on Education loan under Sec 80E of the Income Tax Act comes to the rescue of those aspiring for higher education. When you take a loan for higher studies, deduction is allowed under Section 80E for interest that you pay towards this loan. Several forms of higher studies (including vocational courses) are covered under this section for claiming deduction.
Criteria for Availing Deduction under Sec 80E
- The courses must be pursued after completion of Senior Secondary Examination or its equivalent.
- The individual must pass senior secondary examination from an authorised college, university of state or central or any local authority.
- Higher education includes streams like management, medical, engineering, science, etc., as also vocational training from recognised institutions.
- The loan should have been taken for the purpose of pursuing higher studies of individual, spouse, children of individual or of the student of whom individual is legal guardian. Hence, parents are also eligible to claim deduction of interest paid by them on loan taken for their children’s education.
- The loan has to be sanctioned by a financial institution such as banks or approved charitable institutions.
- HUF (Hindu Undivided Family) is not eligible for the claim under Sec 80E.
- Loan taken from individuals like friends or relatives without proper authorisation from a financial institution is not eligible.
- Deductions under Sec 80E can be availed of for higher education in India or abroad.
Deductions under Sec 80E
- Deductions under Sec 80E are available for a maximum period of 8 successive years or until the time the interest is paid, whichever is lesser.
- There is no upper limit for grant of deduction in respect of interest on loan for higher education.
- There is also no upper limit of the rate of interest which will be allowed as a deduction.
- Deductions can be claimed only once the individual starts paying the interest on the loan taken.
- There is no benefit available on the repayment of principal amount of the loan.
- The tuition fee paid towards the education can be claimed as a deduction under section 80C.
Paperwork for claiming benefits of Sec 80E
- A statement from the institution where the higher studies are being taken confirming the same.
- The statement is to be submitted with the HR department of the company the claimant is working for at the time of declaring taxes.
- Alternatively the statement can be submitted while filing the income tax return.
To make most of the benefits of Sec 80E, it is advised to claim the deductions within 8 years because this way one can claim all the interest amount. Most education loans come with a moratorium period of one year after the completion of the course or six months after the student gets a job, whichever is earlier.
Moratorium period is a period during which you opt not to service the loan. Accrued interest during the moratorium gets added to the principal and is turned into monthly EMIs. Most of the time, banks calculate the EMIs for 8 years, but one can get it reduced as per one’s income-outgo.