Reap tax benefits on education loans:: Business Line

Only if you take the loan from an approved financial institution or an approved charitable institution, can you claim this benefit.

An education loan can not only help you fund higher studies but can also help you save tax. The entire interest you pay on the education loan can be claimed as deduction while calculating your taxable income.

This benefit allowed under Section 80E of the Income Tax Act can translate into tidy savings. For instance, if your taxable income during a year is Rs 10 lakh and the interest you pay on the education loan that year is Rs 1 lakh, then you need to pay tax on Rs 9 lakh. This means Rs 20,600 paid less as tax for the year. You can claim the interest deduction on loans taken to fund studies in India and also abroad. But take note of the restrictions.

CLAIMING BENEFIT

Not all education loans qualify for deduction. Only if you take the loan from an approved financial institution or an approved charitable institution, can you claim this benefit.

Financial institutions include banks and some non-banking financial companies. So, if you borrow money from your friends, relatives or employer, you get no deduction on interest paid. Check with the lender whether a loan taken from it qualifies for the tax benefit.

Only the person taking the loan can claim the deduction. For instance, if your relative takes a loan for funding your higher education, the relative and not you will be eligible for the tax benefit. The tax law states that relative who can claim the benefit mean the spouse, parent or legal guardian of the student. So, if your brother or sister takes a loan to fund your education, they will not be eligible to claim tax deduction unless he or she is your legal guardian.

You need to take a loan for funding higher education. This means a Government recognised course of study pursued after passing the Senior Secondary Examination or its equivalent. So, if you take a loan to pay the fee for your child’s primary school, you get no deduction on the interest paid.

The tax benefit can be claimed for a maximum of eight years – beginning from the year in which you start paying the interest on the loan and for seven consecutive years after that. So, if you service the loan over a 10-year period, the interest paid in the last two years cannot be claimed as deduction. Hence, it may make sense to restrict the tenure of the education loan to a period in you can claim tax deduction.

Of course, if you repay the loan within a shorter time-frame, say six years, you can claim deduction on the interest paid only till such period.

Most education loan lenders provide a moratorium period during which you opt not to service the loan. This period is usually until one year after the completion of the course or six months after the student gets a job, whichever is earlier.

If you choose to pay interest during the moratorium period, it will be taken into account while calculating the time limit of eight years.

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