An education loan gives wings to your career dreams and aspirations. You can apply for an educational loan from a bank or other NBFCs for pursuing a course of your choice after Class 12. You can pay back the loan once you start earning after graduation. Just like other loans, an education loan in India also charges interest on the principal. However, this interest amount is deductible under section 80E of the Income Tax Act.
Here is the list of top ten things that you must know before you claim a deduction.
The tax benefit is applicable only for the interest of the loan and not on the original principal.
However, the entire amount you pay as tax during the tenure of the loan is applicable for deduction, while calculating your personal income tax. There is no limit on the amount that can be deducted.
You can avail this tax benefit if you get an education loan for your children, spouse or yourself or your legal wards. This means that education loan taken for your relatives or siblings doesn’t qualify.
Deduction on your income tax returns is allowed only if you have taken the loan in your name.
This tax benefit is inclusive of education loans for students availed for higher education overseas.
The tax benefit is applicable only for education loans taken from a public/private bank and other approved financial institutions. It isn’t applicable for loans taken from friends, family or an employer.
Initially, this tax benefit was only available for pursuing a course in engineering, management, applied and pure sciences or medicine. However, the tax benefit is now applicable to all part-time or full-time courses including vocational studies pursued after the Senior Secondary Examination or its equivalent.
You can enjoy the tax benefits only from the time you start repaying the higher education loan. It’s available up to eight years or until you pay the interest in full. This implies that if you repay the interest within five years, then you can enjoy the tax benefit only for this period.
Education loans have a moratorium period during which you can opt not to repay the loan. The interest from this time is added to the principal. However, if you wish to pay interest during that period, you can avail tax deduction for the interest paid.
Make sure to inform the Accounts Dept/HR of your company that you wish to avail tax benefits for your education loan payments. This ensures that TDS is adjusted accordingly. If you have failed to make this arrangement, you can claim the tax benefit, while you are filing your tax returns.
The other Myriad Benefits of Education Loans
No early repayment fees for higher studies loans.
Your interest rates are likely to be reduced if you make the payments right on time.
Education loans are highly flexible, which means you can take your time to pay it as long as you pay regularly.
While student loans do not need collateral, you need a guarantor to get your loan approved.
Some banks even include hostel fees, mess fees and tuition fees in the loan amount.
You can take an educational loan even for postgraduate diplomas and other courses.