For most assesses, tax benefits typically revolve around Section 80C for insurance premiums and provident fund payments, Section 24 for interest on housing loan and Section 80D for payment of medical insurance premium. These are normally the most commonly used sections in India. However, there is another very important and less talked about provision under Section 80E for interest paid on education loans pertaining to higher studies. The beauty of this provision is that there is no upper limit for Section 80E and technically any amount can be claimed. The only condition is that it should pertain to interest paid on an education loan taken for the purpose of higher studies.
Understanding the basics of Section 80E…
First and foremost it needs to be remembered that Section 80E pertains only to individuals and this benefit is not available to HUFs (Hindu Undivided Family). Originally, this benefit was only available if you took the loan for your own education. But subsequent to an amendment, the Section 80E also applies to interest paid on education loan taken for self, spouse and for children. Interestingly, the benefit can also be claimed in case of children for whom you are the legal guardian under law, though they may not be you own children.
It needs to be remembered that Section 80E does not have any upper limit. The only condition is that the benefit can only be availed for interest paid on education loan and not for the principal repayment. Secondly, the interest has to be actually paid out of your taxable income during the previous year. Any interest paid out of your non-taxable income will not be eligible for deduction under Section 80E. Also, the interest has to be actually paid and any accrued interest will not be eligible for tax benefit.
The definition of the usage of the loan is quite broad. It not only includes the tuition fees, but also includes books, laboratory equipment, accessories, boarding and lodging for the student. Thus all these items can be claimed as eligible expenses under Section 80E funding.
From where can you avail the loan?
The benefit of Section 80E will be available in case of loans availed from approved financial institutions, banks and approved charitable institutions only. Informal loans availed from family and friend will not be eligible for this benefit. Also the definition of higher education is defined to include any higher studies post Senior Secondary Examination or equivalent level. In recent amendments, many vocational courses have also been added to the list of eligible categories for which benefits of educational loan under section 80E can be availed.
While studies abroad are not included as an explicit category, there is no provision that bars from claiming the benefit of Section 80E for the purpose of studies abroad. That would also depend on how many banks are willing to fund the same.
It needs to be remembered that the deduction can only be availed by the person who has taken the loan. Thus if the father takes a loan then the son cannot avail the tax benefit and vice versa.
For how long can the deduction be claimed?
The deduction for interest on education loan will be available during the assessment year in which the loan is availed plus 7 subsequent years after that. Of course, this is subject to the fact that the loan is not repaid before that period. Hence strategically it makes more sense to restrict your education loan to 8 years as tax benefits are not available after that.
For claiming the benefit under Section 80E, the bank which has lent the education loan gives you an explicit certificate which clearly states that the loan was taken for the purpose of pursuing higher education and hence is eligible for Section 80E. Additionally, the bank certificate also includes the detailed segregation of interest component for the full year and the principal component. As mentioned earlier, the benefit of Section 80E is only available for interest component of educational loan and not for the principal component.
In short, Section 80E provides a very useful method to get a loan for higher education. Banks are a lot more flexible on giving loans for higher education and do not insist on too many documents. At a time when higher education costs are going through the roof, this provides a very tax efficient way of financing higher education for yourself as well as your spouse and children.