How Education Loans Can Ease Your Tax Burden

Prashant A Bhonsle explains the tax benefits you can avail under Section 80E of the Income Tax Act.

In today's competitive world, higher education has become not just a dream but a necessity. However, the rising cost of education can be a daunting challenge for many. To address this, education loans have become a lifeline for students and their families.

Let us explore the tax-saving potential of education loans under Section 80E of the Income Tax Act, 1961.

Understanding Section 80E

Education loans are more than just a means to fund your higher studies; they can also serve as a powerful tool for tax savings.

Section 80E of the Income Tax Act allows individuals to claim a deduction for the interest paid on education loans. This deduction can help reduce your taxable income, putting more money back in your pocket.

What exactly is Section 80E?

Section 80E of the Income Tax Act is a provision that allows individuals who have availed education loans and are currently repaying them to claim a deduction on the interest component of the loan.

It's essential to note that only the interest portion of your Equated Monthly Installment (EMI) qualifies for this deduction, while the principal amount does not offer any tax benefits.

Who qualifies for this deduction?

The deduction under Section 80E is available to individuals as per the Income Tax Act and is not extended to Hindu Undivided Families (HUF) or other types of taxpayers.

To be eligible, the education loan must be taken for higher education, either for yourself, your spouse, your children, or for a student for whom you are the legal guardian.

Where can you obtain the loan?

To qualify for this tax deduction, the loan must be obtained from a bank, financial institution, or an approved charitable institution under the category of an education loan. Personal loans from friends or relatives do not qualify for this deduction.

The purpose of the loan matters

The loan should be specifically taken for higher studies, whether within India or abroad. It encompasses both vocational and regular courses, ensuring that a wide range of educational pursuits is covered.

How much can you deduct?

The interest paid on the education loan is eligible for deduction without any threshold limit. The amount you can claim as a deduction is supported by a certificate provided by the bank, which separates the principal and interest amounts.

Importantly, only the interest portion is deductible, and there is no upper cap on this deduction.

The duration of deduction

The tax benefit under Section 80E is available for a maximum of 8 years, starting from the year you begin repaying the loan or until the interest is fully repaid, whichever comes earlier.

It's crucial to plan the loan tenure in a way that ensures interest payments are completed within this 8-year window to maximise the tax advantage.

How to calculate deductions

Calculating the deduction under Section 80E is straightforward. It should be based on the interest amount paid on the education loan, supported by an interest certificate provided by your bank, financial institution, or approved charitable institution.

Eligibility for tax deduction

To claim the deduction, the loan must have been taken for higher studies from a recognised bank, financial institution, or approved charitable institution.

How to claim tax deductions under Section 80E

When filing your Income Tax Return (ITR), you should declare the amount of interest you've paid on the education loan separately under Section 80E. This will ensure that you receive the rightful tax benefit.

Required documents for claiming deduction

While filing your ITR, you won't need to upload the interest certificate as a mandatory document. However, it's essential to retain the interest certificate provided by your lender to support the deduction amount in case it's requested by the Assessing Officer (AO).

Conclusion

Education loans have emerged as a lifeline for students and their families, making higher education more accessible. What many may not realise is that these loans offer a valuable tax-saving opportunity through Section 80E of the Income Tax Act.

By understanding the eligibility criteria and the nuances of this provision, you can significantly reduce your tax burden while pursuing your educational dreams.

Education loans not only fund your aspirations but also serve as a powerful tool for financial planning and tax optimisation.

Prashant A Bhonsle is the founder and CEO, Kuhoo Technology.