Education loans are the doorway for meritorious students to get access to a world-class education. A student loan helps in covering the tuition fee and living expenses and helps students save a considerable sum of money on interest paid on EMIs. India has a gigantic education sector, and it is slated to see an exponential rise. According to a study, India’s education sector is all set to touch a whopping $225 billion. Out of which a considerable part will be from banks and other financial institutions taking a big pie of the cake. Banks and other lenders are coming up with lucrative offers and easy terms of repayment of loans. In the scheme of things the government also supports students in making the credit more accessible and easing terms of loan repayment.
As per section 80E of the Income Tax Act, 1961 deduction is allowed on the total interest amount of the EMI paid during the financial year. This is an approach that incentivizes the credit culture in the education sector. Many students can’t afford to finance their studies, and education loans are a great way to make high-quality education accessible to a larger section of society. However, still many students find it difficult to take the loan. So, in order to further incentivize, the deductions are allowed to reduce the burden of interest on education loans. There are many education loan tax exemption calculators available on the internet that tell the exact amount one has to pay once the repayment starts.
Persons Eligible to Claim Tax Deduction under Section 80E
The claim for deduction of Interest paid on loans taken for pursuing higher education from taxable income under section 80E of the IT Act can be claimed by individuals only. For Hindu Undivided Families or corporations, there is no provision to claim tax deductions under section 80E. Also, the person making a claim must be directly related to the borrower, viz—parents, spouse, self, or in case of legal guardian. The claimant must be the one who is directly involved with the borrowings. It comes as a great relief for parents who took loans for the higher education of their wards and take deductions on the interest amount of the EMI paid during the financial year.
One of the best things about the exemptions is that it is applicable for private and public sector borrowers. However, for those taking loans from NBFCs and International lenders, there is no provision for claiming deductions under section 80E. Also, loans taken from friends, family, relatives, or chit funds are not included in the exemption. So, it’s advised to ask for exemptions beforehand from the financial institution from which the loan will be sanctioned.
Types of Education Loan Eligible For Deductions
The government has given utmost liberty to the borrowers to take an exemption for all sorts of education loans. If there is an education loan, the borrower will certainly be eligible for tax deductions. Only in the case of NBFCs and International lenders, there is no provision for tax deductions under section 80E. Many times students get confused if the vocational or short-term courses are eligible for taking deductions or not. But the banks have a clear policy on this, and as long as there is an option for taking a loan, deductions can be claimed. It is also independent of the fact that whether a loan is for domestic or abroad education. There is no differentiation on the loan amount, too, as abroad education loans usually are way more valued than loans for domestic educational institutions. It has huge benefits for working professionals planning to do mid-career professional courses. The deductions help them in advancing career options without having the need to worry about high-interest payment since deductions are available for all the loans as long as it is taken from a public sector or private bank. In some cases, education loans from NBFCs are also eligible, but this must be confirmed with the Central Board of Direct Taxes or the CBDT.
Some Crucial Points on Tax Deductions
The tax deductions under Section 80E come with certain caveats, and a loan applicant should bear all the factors into their mind before moving ahead with the loan:
- The loan applicant can only be the one claiming tax deductions. For instance, if a man takes a loan for his daughter and starts the repayment after completing his studies. Then neither will be in the position of claiming tax deductions. The repayment must be made from the borrower’s bank account for a tax deduction claim under Section 80E. The borrower and person claiming tax deductions can be different; they have to be the same.
- When it comes to higher education loans, it means any loan for studies post completion of the senior secondary examinations.
- The tax benefits can be claimed for spouses, children, or legal guardians, but this must be cleared with the respective financial institution sanctioning the loan.
- There is no upper limit on the amount for which tax deductions can be claimed. However, one must bear in mind that the deduction is only available on the interest paid, not the principal amount.
- The tax deductions can be claimed only after the repayment starts, and they can be claimed until the interest is paid or eight years, whichever is earlier. Therefore, it is advised to ramp up the education loan repayment within eight years to claim the benefits under Section 80E. After eight years, the tax deductions aren’t allowed.
- The government must recognize the educational institution for which the loan is taken for claiming deductions under Section 80E.
Online Tax Exemption Calculators
It is of paramount importance to calculate the tax exemptions that can be claimed under Section 80E. Many online tax exemption calculators help the borrower in knowing the exact amount that can be saved by claiming deductions under Section 80E. These online tools give all the details regarding the EMIs and subsequent deductions that can be claimed for varying loan amounts. A borrower can also check how much one can save in deductions that they will be getting for different loan amounts and thereby adjust the loan amount. The online tax exemption calculator is designed by considering a number of factors, and they give almost the exact numbers as the original deduction amount. So, the reliability of online tax exemption calculators is very high.
The user interface for calculators changes but is primarily designed by keeping in mind customers from all walks of life. These calculators are very easy to use, and just by entering a couple of details, one can know the exact tax deduction they will be getting once the education loan repayment starts. Almost all the major lenders provide their own EMI Calculators wherein a customer can quickly check details about the education loan.
Difference Between Section 80E and Section 80C
Section 80C and Section 80E both are related to tax deductions, but they are meant for different purposes. Many a time, the borrowers confuse Section 80E with Section 80C. The reason is apparent since both are used for deductions. Section 80C is used for claiming deductions for the tuition fee paid for the education, and it is also applicable for both domestic and abroad education. This helps people in getting some deductions at the time of making payment for the studies. While Section 80E is meant for getting deductions on the interest paid on loans taken for pursuing higher education from taxable income under section 80E of the IT Act.