Education is a long drawn affair for millions of people like us as we spend the first 20 to 25 years of our life studying in schools and colleges. Acquiring education is an involved process allowing us to specialize in a trade, subject or discipline of your choice. The education we receive allows you to secure a good job and earn a living. It can also allow us to become an entrepreneur if a job is not something you would want to pursue.
Now, it is a fact that education is a fundamental right up to the age of 14 years in India enabling the children to acquire basic education free of cost. However, you are not guaranteed higher education as it becomes optional once you cross 14 years of age. It is also a fact that higher education is expensive in India and many students cannot complete their education for want of financial resources to pay for tuition fees and living expenses during the course of study.
Thankfully, the governments at the centre and states and the financial institutions like Tata Capital have stepped in to offer timely education loans to needy students. Lenders like Tata Capital offer these loans under the personal loan umbrella. Though the education loan is under the personal loan, the personal loan interest rates are lower for education loans as per the government’s directives.
Just because you are taking an educational loan does not mean that it is the only outflow of money. Believe it or not, you can claim tax benefit for the education loans that you avail.
If this sounds like a win-win proposition for you, let’s take a look at the various tax benefits available.
Deduction of interest on education loan
The interest you pay based on the personal loan interest rates charged by the lender on the education loan is tax deductible. The various provisions of this tax benefit include
- Deduction of interest is available against your taxable income without any limit under Section 80E of the Income-tax Act provided the education loan is from financial institutions, banks and approved charitable entities
- The deduction is available whenever you pay interest even if it is during the course of study and you can claim the full amount of interest paid in that year even though it could relate to earlier years
- The deduction is available only when supported by interest certificate from an approved lender
The time period for deduction
The period of deduction is for 8 years from the year that you make the first interest payment. This is available for a consecutive period of 8 years and ceases once this period is over. You can use the moratorium period to not pay interest if you so desire.
Parents also eligible for deduction
The tax benefit on interest paid on education loan is available to both the student as well as the parent as long as the parent is a co-applicant along with the child. The advantage is that you can claim an interest deduction for the individual (parent or child) who is liable to higher tax. However, remember that this is available only to individuals and not HUF.
Deduction available for most courses
All education loans availed of for any course post higher secondary are eligible for tax deduction. Even part-time and vocational courses are also eligible. The only caveat is that the student must enroll in an educational institution recognized by the governments at the centre or states or even local authorities. The amount you pay as interest calculated on the personal loan interest rates on education loan is also available for deduction for courses abroad provided they are on the approved list.
Approved entities for borrowing
The tax deduction is available only for education loans availed from banks, NBFCs and financial institutions recognized and approved by statutory authorities. Even education loans taken from NGOs and charitable organizations can qualify for a tax deduction if such institution satisfies the government regulations. Remember, hand loans from relatives and friends are not eligible for tax deduction.
From the foregoing, it is clear that availing an education loan is quite advantageous for students for the many benefits it endows in terms of the moratorium, tax benefits and low personal loan interest rates applicable. Even if you can afford the costs of education it is sensible to avail an education loan and enjoy the many advantages.