Did you know that similar to Section 80C of the Income Tax Act of 1961, you can claim tax benefits such as an education loan deduction under Section 80E when investing in education? Yes, you heard that right! Certain loans allow you to benefit from tax exemptions on interest payments.
In the current scenario of high education costs for higher studies, education loans are becoming essential for managing these expenses. Whether for higher studies at an international university, or for your child’s education at top colleges within India, a loan can help you meet these costs without straining your finances.
Additionally, you can claim a tax benefit as Section 80E on the interest of the education loan, easing your financial obligations.
Section 80E is somewhat similar to Section 80C, but it defines the deduction related to education or student loans. When you get an education loan from a bank or a non-banking financial company, you become eligible for tax deductions on the interest you pay.
There is no exemption on the principal amount. You can claim the deduction for up to 8 years as long as you continue paying interest on your loan during this time.
As per the latest budget, the threshold limit for tax collected at source (TCS) on remittances (or funds sent to) for international students has increased to ₹10 lakh. Previously, this limit was ₹7 lakh. If the remittances are within the threshold limit and sourced by the loan, no tax will apply. For remittances over the threshold limit, 0.5% TCS applies if it is funded by the loan. However, the TCS increases to 5% if it is from other income sources.
Only an individual can claim deductions on the education loan taken for self, spouse or children. Even legal guardians are eligible for claiming deduction if they have applied to fund a student's higher education. Furthermore, this benefit is only available if you are filing your taxes as per the old tax regime and not the new tax regime.
Here are some conditions under which you can enjoy tax savings when repaying an education loan:
In addition, you need to provide an interest certificate from the bank or NBFC from whom you borrowed the funds to claim deductions.
Student loan interest tax deductions do not have any upper limit or restriction. This means you can get a deduction of the full amount you pay as interest on your education loan from your taxable income. This lightens the load of financing education via a loan.
To claim a tax deduction under Section 80E of the ITA 1961, you must provide an interest certificate. You can get this certificate from the bank or NBFC you got the loan from. This certificate must have separate columns depicting the principal and interest amount paid in the financial year.
As per the education loan income tax exemption conditions, 100% of your interest payment is applicable for deductions. Assume that your gross total taxable income is ₹5.5 lakh, and ₹2 lakh is the interest you paid on an education loan. When filing your income tax return, the final amount taxed will be only ₹3.5 lakh.
Even though student loan interest is tax-deductible, mistakes can cost you whether they relate to documents or calculations. Take a look at the two most common errors to avoid.
The complete interest amount is eligible for tax rebate on education loans but this applies only to the financial year. This may lead to mistakes so ensure you check the interest certificate of the lender to avoid this.
Not being able to prove how much interest you paid in a financial year can cause issues. Ensure you keep the documents on hand before filing your ITR.
Section 80E deals with deductions you can make on education loan interest payments in a financial year. If you have opted for an education loan for higher studies, 100% of the interest payment is available for tax exemption.
An individual applying for an education loan for self, children, spouse/partner can claim tax benefits under Section 80E. Even legal guardians of a student can do so.
No. The principal amount of an education loan is not deductible. Only the interest payment is exempt from taxation.
You can claim tax deductions under Section 80E for 8 years from when the repayment starts or until the complete interest is paid, whichever happens earlier.
You must provide an interest certificate received from the bank or NBFC from whom you have borrowed the loan.
No. There are no limits on the tax rebate for education loan interest payments.
Yes. The tax deduction claims are available for yourself, your spouse/partner or your children’s higher education
