May 182015

Tax Benefits of Education Loan

Have you taken an education loan to support higher studies of yourself or of your spouse, Children or for the student of whom you are legal guardian and you are not aware of the tax benefits that you are entitled to. Here an attempt is made to explain the tax treatment of loan taken for Higher Education.

Deduction in respect of payment of interest on loan for higher studies [Sec.80E]

Deduction under section 80E is available if the following conditions are satisfied:



1 The assessee is an individual or a natural person.
2 He had taken a loan from any bank or financial institution, i.e., a banking company or notified financial institution or an approved charitable institution.Approved charitable institution means an institution approved for the above purpose of section 10(23C) or 80G2(a).

The loan includes not only tuition or college fees but also other incidental expenses for pursuing such studies like hostel charges, transport charges etc.

3 The loan was taken for the purpose of pursuing higher education.Higher Education: Means

All fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central Government or State Government or Local authority or by any authority authorized by the Central Government or local authority to do so

Thus, the above definition includes loan taken for undertaking vocational training in the area of skill development, liking sewing, agriculture etc. also it further include loan taken for undertaking B. Tech, B. Com, B. Com, M.Sc, CA, etc.

4 The loan was taken by the taxpayer for the purpose of pursuing his own higher education or for the purpose of higher education of his relatives, i.e., spouse/any child /the student for whom the taxpayer is the legal guardian.Hence parent can take deduction of interest paid on education loan taken for their children.
5 Amount is paid by the individual during the previous year by way of interest on such loan.
6 Such amount is paid out of his income chargeable to tax.
Conclusion If all above check box are P, then deduction of interest paid on loan taken for higher education is availableIf any of the above check box is O, then deduction of interest in not available

Further, repayment of principle amount is not deductible any provision of income tax

Amount deductible

If the above conditions are satisfied, the entire amount paid by way of interest is deductible under section 80E.

Following points should be noted –

  1. The above deduction is allowed in computing the taxable income of the initial (i.e., assessment year relevant to the previous year in which the assessee stars paying the interest on the loan) and 7 immediately succeeding assessment years (or until the above interest is paid in full,whichever is earlier).
  2. From the assessment year2006-07, no deduction will be available under section 80E in respect of repayment of principal amount.