Education Loan Tax Benefit

An education loan tax benefit is a provision that allows individuals to claim a tax deduction on the interest paid on a loan taken for higher education. This tax benefit is available in many countries, including India, where it is provided under Section 80E of the Income Tax Act. 

In India, tax benefits are available for educational loans under Section 80E of the Income Tax Act. This section allows individuals to claim deductions on the interest paid on an educational loan taken for the purpose of higher education. 

This tax deduction is available to all individuals, regardless of whether they are salaried or self-employed. It can be claimed by the individual who has taken the loan or by the parent or guardian of the student if the loan is taken in the student's name.

Claiming this tax deduction can provide some relief to individuals who are struggling to meet the high costs of higher education. It can also encourage more people to pursue higher education and invest in their skills and knowledge.

It is important to note that these tax benefits are only available for loans taken from recognized financial institutions, such as banks and other lending organizations. Loans taken from friends or family members are not eligible for these tax benefits.

According to the Income Tax Act of 1961, an individual who has taken out a loan for their own or their spouse's or children's higher education, or if they are the legal guardian of someone who has taken out such a loan, may be eligible for a tax benefit on the education loan under Section 80E.

To be eligible for the tax benefit, the loan must have been taken from a financial institution. The tax benefit is available only for the interest paid on the education loan, not the principal amount.

For example- Let's suppose the total EMI of your Education Loan is Rs. 20,000 and in that installment, your total principal amount is Rs. 16,000 and the rest of Rs. 4,000 is your interest amount, as per section 80 E, you can claim tax deduction only for the interest paid i.e. 4000 per month. So, for the total EMI paid on your Education Loan would be Rs. 2,40,000, you can claim a Tax deduction of Rs 48,000 for the financial year.

• The deductions are available for a maximum period of 8 years, starting from the year in which the individual starts repaying the loan. 
• There’s no cap for the tax deduction in education loans, you can avail of any amount of interest paid for a tax deduction under section 80 E 
• The tuition fees paid to any educational institutions, colleges, or universities in India for full-time courses are eligible for tax deduction under Section 80C of the Income Tax Act. The maximum deduction available under this section is INR 1.5 lakhs per financial year.
• You can save up to 10 times more tax if you take up an education loan to fund your education than using your own funds
• An education loan income tax exemption can be claimed either by the loan applicant or the co-applicant. So, even if the student returns to India during their loan repayment period, either they or their co-applicant can claim this education loan income-tax exemption. In any case, only one of the two can claim this exemption.

• An employee can avail of tax benefits on an education loan by informing their company's HR or accounts department so that less TDS is deducted from their salary. You can also claim it by filing tax returns online.
• Declaring that you have made interest payments towards the education loan when you file your annual TDS is the only step to claim this education loan income tax exemption under Section 80 E.
• As a co-applicant, you may provide receipts of your EMI payments as proof while declaring your TDS.
• If the co-applicant is a salaried employee, this proof of payment has to be provided before filing the TDS.

Although Section 80 E aims at helping education loan applicants save money on their repayment amount, there are certain conditions under which, they may not benefit much from this provision. Here is how.

Scenario 1: If the loan applicant is employed abroad after the course completion and the co-applicant doesn't qualify.

When you work in a country other than India, you are not eligible to file an income tax claim under Section 80 E. Also, if your co-applicant's monthly salary is less than Rs.5 Lakh, or if they only earn a substantial amount, then, according to the percentage of education loan income tax exemption as mentioned in the above table, they may not be able to save much under this provision.

Scenario 2: If your co-applicant has retired or is going to retire.

If your co-applicant has already retired with a pension or is nearing retirement, it is obvious that the monthly pension of your co-applicant will not match up to the salary drawn when they were employed. Generally, after retirement, their taxable income will reduce due to the senior citizen quota.

Scenario 3: Both, the student and the co-applicant are not in India.

If both you and your co-applicant are not present in India as they belong to the NRI community (Non-Resident Indian), and the loan applicant is not planning to be in India during the loan repayment years. In such a case, both you and your co-applicant are not eligible for an education loan exemption under Section 80 E.

The following conclusions may be drawn from the above scenarios:

• If your co-applicant's annual income is less than Rs. 5,00,000, declaring your interest under Section 80 E may not benefit you much.
• If you do not earn in India during your loan repayment period, you become ineligible to claim an exemption under this provision. The same applies to your co-applicant if they belong to the NRI community.