For most of the people a part of the money earned goes towards paying Income tax to the government. As it is impossible to avoid the payment of taxes on the income earned by the individuals, there are certain deductions available on the taxes paid by the tax payers. Education loan is such an instrument that helps you save taxes.
An education loan can provide the fund for higher studies but also help in saving the taxes. The interest paid on the education loan can be claimed as deduction under section 80E of the Income Tax Act, 1961. Education is one area in which we pay a lot of amount. We spend a huge amount from our income so that we can arm ourselves and our children or spouse with the degrees. The income tax department of India has a provision of deductions against the education loan under section 80E.
Section 80E of Income Tax Act:
Section 80E of the income tax act, has provides provisions for tax deduction on educational loans. Such loans can be availed for children or spouse of the taxpayer. This means that any interest paid by a person clearing the education loan is qualified for the deduction under Section 80E.
Few points to be remembered under section 80E:
1. Tax deducted towards the payment of interest can be claimed only after an individual has started repaying the loan, and can be claimed only in a particular year when interact is paid on the education loan.
2. The deduction is applicable after you have started repaying the interest on loan.
3. You can claim the deduction only eight times since the repayment of first interest.
4. The deduction can be claimed on the principle amount of loan.
5. The deductions are applicable only to individual. Hindu undivided Families or companies are not eligible to claim the benefit under section 80E.
6. The education must be from a recognized institution.
7. You can claim deduction on a loan taken in your name as x`
8. You can claim the deduction if you have taken the loan for the education of your spouse or child as the loan in your name.
9. The section covers the loan taken for education abroad.
10. The deduction under section 80e is over and above rupees 1.5 lakh deductions, you can claim under section 80C.
11. One should inform his/her employer about the deduction. Otherwise Tax Deducted at Source (TDS) will be deducted and you will have to file for tax refund
12. When a person avails the loan for higher studies, deduction is allowed under Section 80E for the interest paid towards loan. Different type of higher studies including various vocational courses are covered under the Section 80E for the interest paid on loan.
13. The individual should be a taxpayer. The section 80 E deduction is not allowed to a Hindu undivided family or any other type of taxpayer.
14. The deduction provided is on the interest paid on the loan taken.
15. The loan taken should not be from any relative or any other person/ entity. It should be from a bank or any approved charitable institution.
16. The loan availed is taken for higher education of you, your children and your spouse.
17. The interest paid on the loan should be from your taxable income.
Meaning of higher education under section 80E
Higher education as mentioned under section 80 E of income tax act includes all the field of studies including the vocational courses pursued after passing the senior secondary examination or its equivalent.
The tax deduction on education loan is available only in the year of payment, tax payer cannot claim such deduction if the payment of education loan has not yet started.
Section 80E tax deduction is not available on the principle portion of your education loan.
Time period and the amount of deduction
There is No limit on the amount of interest which can be claimed as deduction under section 80 E. The deduction is available till the time interest is paid or for maximum 8 years whichever is earlier.
One can obtain a statement from the approved institution from which the loan has been provided to find the amount of interest of which is to be paid for each year. No deduction is provided on the tuition fees or any amount towards the principal repayment of the loan, the deduction is only provided towards the interest which is to be paid on the loan. The tuition fee paid towards the full time education of your children can be included as a deduction under Section 80C.
The deduction can be claimed by the guardian if the loan taken has been used for the educational purpose of your spouse or you yourself. As the time period for the deduction is limited to a maximum of eight years, it is advised to pay back the loan in eight years to claim maximum interest as possible. The law is not concerned whether the higher education has to undertaken in India or in foreign.
Higher education is an expensive affair according to today’s economic condition. Section 80E does not have any upper limit which can be claimed for deducting the taxes, provided that the deductions can be claimed only for eight years. The deduction clamed is not available for principal amount and only interest is considered for deduction.