As the economy expands, expenditures on education are on the rise. The education sector constantly evolves, increasing the financial strain on middle-class households. An education loan assists in funding your higher studies and offers significant tax-saving opportunities. If you have obtained an education loan and are repaying it, the interest paid on it qualifies for a deduction from your total income under Section 80E.
It’s important to note that this deduction is specifically for the interest component of the Equated Monthly Installment (EMI), and no tax benefit is available for the principal part of the EMI.
What is Section 80E of Income Tax?
Section 80E of the Income Tax Act provides a deduction from taxable income for the “interest component” paid on higher education loans obtained from notified financial institutions, approved charitable institutions, or banks. This deduction applies to the interest paid on education loans taken for the higher studies of oneself, spouse, or children (including those for whom the taxpayer is the legal guardian).
Purpose of Education Loan
The loan must be taken to pursue higher studies. This section applies regardless of whether the education loan is for higher studies in India or abroad.
Higher education encompasses all academic disciplines pursued after completing the 12th class (senior secondary examination or equivalent). This includes both vocational and traditional courses.
Who can Avail of Tax Advantages on the Interest Paid for an Education Loan?
The tax benefits on interest paid on an education loan can be claimed by the individual who has taken the loan for themselves, their spouse, children, or a person for whom they are a legal guardian. The individual repaying the loan for the individuals as mentioned above can avail of the deduction under section 80E.
However, certain conditions must be met:
- The loan must be taken for higher education purposes.
- The deduction can only be claimed for a maximum of 8 years.
- The loan must be in the name of the taxpayer.
- Only loans from recognised charitable and financial institutions are eligible for deduction. Loans from friends and relatives are not eligible.
- If parents share the EMI payments, they can claim the interest part they pay, while the individual can claim the rest.
It’s important to note that only individuals can claim deductions under section 80E. Hindu Undivided Families (HUF) and companies cannot avail of these deductions under the Income Tax Act.
What is the Deduction Amount Under Section 80E?
Under section 80E, no maximum or minimum deduction limit is specified. The deduction amount on interest payment is not affected by the interest rate charged by the financial or charitable institution, the loan amount, or any other factor. This section allows for deducting the actual interest paid on education loans within the financial year.
From Where Should the Education Loan be Obtained?
According to Section 80E, the interest paid on an education loan should be availed from an approved charitable or recognised financial institution. Loans from any other entity are not eligible for the deduction. Here’s how you can identify these institutions:
- Financial institution: A financial institution as defined under the Banking Regulation Act of 1949 and includes any bank operating under the regulations stipulated in the Banking Regulation Act.
- Charitable institution: A charitable institution is authorised under clause 23C of Section 10. These institutions are typically involved in charitable activities and have been approved by the relevant authorities.
Do You Need Any Documentary Evidence to Claim a Deduction Under Section 80E?
No documentary proof needs to be attached when claiming a deduction under section 80E while filing your income tax return. However, it’s essential to keep the following documents safe in case the income tax department requires them during any future scrutiny:
- Sanction documents of the loan.
- Repayment statements from the financial institution or charitable institution. These statements should separate the principal and interest amounts repaid.
- Interest certificate for each financial year from the approved bank or financial institution from which the loan is taken.
What is the Time Frame or Limit for Claiming a Section 80E Deduction?
The deduction for interest on the loan begins from the year you initiate repayments. It’s available for a maximum of 8 years from the start of repayment or until the interest is fully repaid, whichever occurs earlier.
If the loan is fully repaid within five years, the tax deduction is limited to 5 years, not eight years. Additionally, interest deductions paid beyond eight years cannot be claimed if the loan tenure exceeds eight years. Therefore, it’s recommended that education loans be repaid within eight years.
For example, if you took an education loan in the Financial Year 2022-23 and began paying interest in the same year, you can claim a deduction under section 80E for the Assessment Years 2023-24 to 2029-30 (i.e., eight assessment years).
However, if you repay the entire loan within five years, the tax deduction will only be allowed for five years, not eight.
For instance, if you repay the entire loan within five years, you can claim a tax deduction under section 80E from the assessment year 2023-24 to 2027-28 (i.e., until the loan is completed).
How Can We Determine the Deductions Applicable Under Section 80E?
You can follow the below steps to compute the tax advantages under section 80E.
Particulars | Amount |
---|---|
Income | Rs 6,50,000 |
Less: Interest paid (Deduction u/s 80E) | Rs 1,00,000 |
Net Taxable Income | Rs 5,50,000 |
The interest paid Rs 1,00,000 on the education loan reduces the taxable income to Rs 5,50,000.
Final Words:
In conclusion, Section 80E of the Income Tax Act offers a significant financial benefit to individuals repaying education loans for themselves, their spouses, children, or wards. This deduction, aimed at easing the burden of higher education expenses, allows for deducting the entire interest component of the Equated Monthly Installment (EMI) paid towards the loan.
By availing of this deduction, taxpayers can lower their taxable income, reducing tax liabilities. It’s crucial to adhere to the conditions outlined under Section 80E, such as obtaining the loan from approved financial or charitable institutions and ensuring the loan is utilised solely for higher education purposes. Proper documentation of the loan sanction, repayment statements, and interest certificates is essential for claiming this deduction during tax filing.
Additionally, taxpayers should be mindful of the maximum deduction period of 8 years or until the interest is fully repaid, whichever is earlier. By leveraging Section 80E, individuals can fulfil their educational aspirations and enjoy tax benefits, promoting accessibility to quality education and financial stability.