Many taxpayers in India are taking education loan to finance their higher studies but few of them know tax benefits on education loan. In this article we will let you know tax deductions on education loan and how to claim such deduction in your IT return.
Repayment of education loan will have two components. One is the principal amount and the other one is interest on principal amount. Tax deduction on education loan is allowed only for the interest components that you paid during the financial year. Payments for principal amount will not be eligible for deduction under section 80E.
Provisions of tax deductions on education loan are narrated in section 80E of IT act. In our following discussion you will know this provision in detail.
Who is eligible for tax deduction on education loan?
To know who is eligible for tax deduction on education loan we have to look into two things. The first thing is who is taking loan and the other one is from whom loan has been taken.
Section 80E of IT act specifically mentioned that education loan taken for self, spouse, children of the individual or in case of a legal guardian the student for whom this education loan has been taken as a legal guardian, will be eligible for tax deduction on education loan. The last part “legal guardian” allow you to take education loan for any family members to get eligible for tax deduction.
Please remember the person who has taken education loan will only be eligible for tax deduction. For example; if your father has taken education loan for your higher studies then your father will be eligible for tax deduction not you. To get eligible for such deduction under section 80E, your father has to repay the interest amount not you.
To get tax deduction under section 80E, you have to take loan either from a bank, notified financial institutions or approved charitable institution. Approved means the charitable institution must have IT department’s approval.
Meaning of Higher education – Section 80E
Purpose of education loan as mentioned in section 80E is higher education. Higher education means any course of study pursued after passing the senior secondary level or its equivalent from any school, board, university recognized by central government or by other authorities like the state government or local authority.
There is no provision that the higher education course should be in India or it should be part time or full time basis to get eligible for tax deduction under section 80E.
Quantum of tax deduction on education loan
Section 80E of IT act has not specified any limit of the amount that will be allowed as tax deduction on education loan. If you have taken a higher loan then the entire amount paid towards interest on education loan during the financial year will get eligible for tax deduction.
Such deduction on education loan can be claimed only for a period of 8 years from the year when interest payments started. If you have repaid your education loan before 8 years time limit then tax deduction on education loan will be restricted till the year for final payment and not till the end of 8 years. This deduction on education loan will be available till the end of 8 assessment years or completion of loan repayment period whichever is earlier.
After taking education loan you are required to make payments of all the dues that you are liable for the financial year. As per section 80E of IT act, only payments made during the financial year will be eligible for tax deductions on education loan.
If you have opted for moratorium period then your eligibility of 8 assessment years as stated above will start after moratorium period over and from the year when you start repaying your loan.
After making all payments for the financial year, you are required to get a certificate from your bank with segregation of principal and interest payments. Produce that certificate before your employer to claim tax deductions on education loan.
If you are a self employed person then keep the certificate with you and avail income tax deduction on education loan while filling your income tax return. You are not required to send this certificate along with the acknowledgement form to IT department. If required IT department will ask you to produce the certificate and at that time you have to produce it.