Tax Benefits on Education Loan

Higher education is getting expensive each year. Management education at any premier management institute in India will cost north of Rs 15 lacs for two years. And the high cost is not just limited to management education. Not everyone may have the resources to fund such education on own. Those who don’t have the resources, can opt for education loans. Good part is that you get tax benefits for repayment of education loans. Such tax benefits can reduce the effective cost of loan. However, as with any tax benefit, there are a few conditions to be met before you can avail such tax benefit.

In this post, let’s look at tax benefits for education loans in detail.

What Are the Tax Benefits on Repayment of Education Loan?

  • The entire interest that you pay on Student loan is tax-deductible under Section 80E of the Income Tax Act.
  • There is no cap on the tax benefit. The entire interest paid is deducted from your taxable income.
  • Only the interest component of the EMI is tax-deductible. There is no tax benefit for principal repayment (or the principal component of the EMI).

Are All Education Loans Eligible?

No. The loan must be from a recognized financial institution or an approved charitable institution. Repayment of Loan from your employer, a relative or a friend won’t be eligible for tax benefit under Section 80E.

Point to Note: Education loans typically have moratorium period where you do not have to pay either interest or principal for a few years. Repayment starts once you have finished your education. However, don’t mistake it for waiver of interest. Interest keeps getting accrued to the loan amount during the moratorium period.

How Long Can I Avail This Tax Benefit?

You can avail this tax benefit for a maximum period of 8 years. This period does not start from the date you take the loan but from the year in which you avail the tax benefit for the first time.  To put it another way, you can claim tax benefit in the year you start repaying the loan and the immediately succeeding 7 years. Hence, if your loan repayment schedule exceeds 8 years, you won’t be able to get tax benefit beyond 8 years.

For instance, you have taken loan in FY 2015. However, if you are availing the benefit for the first time for interest payment in FY2018, you can claim this benefit only till FY2025. In this example, FY2025 is the latest you can claim tax benefit. If the loan gets repaid in FY2021, you cannot avail any benefit in FY2022 and thereafter.  Makes sense too. What will you get tax benefit for if you are not repaying the loan?

Another point to note is that the above information is for a single loan. So, if you have taken 2 education loans for your kids, each will have a separate 8 year window. For instance, if the repayment of loan taken for your daughter’s education (taken in FY2012) started in FY2014, you can take tax benefit till FY2022. Along with it, if repayment of loan taken for son’s education started in FY2016, you can take tax benefit till FY2024. You can avail tax benefit for multiple education loans at the same time. You can avail tax benefit for as many education loans as you want. There is no restriction.

There is no provision for carry forward of this tax benefit. You can claim the tax benefit only for the interest paid during the previous year.

Tax Benefit Is Not Just for Own Education

  • The eligible loan can be for own higher education or for higher education of your spouse and childrenHence, parents can take tax benefit on repayment of education loan taken for kids’ education.
  • You also get tax benefit for education loan taken for a student for whom you are a legal guardian.
  • You CAN NOT take tax benefit for education loan taken for any other relative including your siblings.
  • The education loan has to be in your name if you want to avail tax benefit. Therefore, you will get tax benefit for education loan in your name for your daughter’s education. However, you will not get tax benefit for repayment of education loan in your daughter’ name for her education (even if you are repaying the loan). Keep this aspect in mind.

What Qualifies as Higher Education?

As per Section 80E of the Income Tax Act, “higher education” means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university authorized by the Central Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so.

  • Hence, your education after X std. will satisfy higher education criteria.
  • Even loan taken for education abroad qualifies for tax benefit under Section 80E. There is no limitation that the education has to be in India.

Further Reading

  1. Income Tax website
  2. Livemint: A guide to tax benefit on education loans

Disclosure: I am not a tax expert. You are advised not to base your decision solely on the contents of this post. You must consult a tax consultant for specific taxation advice.

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