The first step to success starts with knowledge. For many, the path to success is in the form of formal education. Formal education costs money and sometimes it is an educational loan that comes handy. Taking an education loan is a game-changer move for many cash-strapped students, who have an aspiration to grow. It allows the student to invest in themselves.
From an early stage in a career, students also learn something that helps them later in life: loan repayment. An education loan not only helps a person build a credit history that they can leverage for bigger loans but deliver tax savings. Yes, an education loan can save tax, unlike a personal loan. Without further ado, let us look at how you can save taxes.
Under the Income Tax Act Section 80E, there is an income tax deduction or interest on education loan is taken for applicable education. However, the deduction on an education loan is provided only for interest part of the EMI. The principal repayment does not fetch any tax saving. In case of any personal loan, even if it is used for education purpose, such a tax saving is very difficult to get. Hence when you apply for a loan, make sure it is an education loan only.
Who can claim?:
Only an individual can claim this Section 80E deduction. It is not available to a Hindu Undivided Family or HUF, or any other kind of taxpayer. Remember the education loan should be taken for the higher education of self, spouse or children. You can also take the loan for a student for whom the individual is a legal guardian. So, parents can claim this deduction for the education loan taken for higher studies requirement of their children.
Do remember to be eligible for saving taxes, the education loan should be a bank or a top financial institution like Tata Capital or any approved charitable institutions. Loans taken from friends or relatives don’t qualify for the tax deduction. Please note a personal loan taken for education purpose from the above institutions will not be eligible for tax deduction.
The ideal way to know whether an education loan from an NBFC like Tata Capital can get you 80E tax benefits is to simply view the income tax department’s notification specifying that NBFC is eligible.
If you cannot get an education loan for the course chosen by you, do check out personal loan option. Use a calculator to understand the personal loan EMI in that case.
Purpose of loan:
The education loan should be taken to pursue higher studies. While applying for an education loan, the location of the institute be it international or domestic, does not matter. Also, neither does the selection of course. So if you want to study Baking in a renowned Pasty School in London, you can apply for an education loan from an institute like Tata Capital. Also, you have to remember that an education loan can only be taken after completion and passing of Class 12 exams.
Tax deduction amount:
The deduction allowed for tax savings is the total interest part of the EMI paid during a financial year. There is no limit on the maximum amount. The limit is up to the interest paid. So, if you paid Rs 5 lakh as interest amount, the deduction will be for Rs 5 lakh.
However, your word is not enough for claiming tax benefit on education loan. You will need to produce a certificate from your bank or lending financial institution like Tata Capital. Such a certificate should clearly mention the principal and the interest portion of the education loan paid by you during the concerned financial year. As said above, only the total interest amount paid will be allowed as a deduction.
This tax deduction can be claimed on the income tax filing. It cannot be claimed on any other taxes paid like GST, excise. When you are filing the income tax return, you will have to mention the education loan interest amount.
Period of deduction:
The deduction for the interest on an education loan starts from the year in which you started repayment. It is available for 8 years starting from that year, or until the interest is fully repaid whichever happens earlier.
So, if the entire payment is done in 6 years only, then you will be able to tax deduction on the interest paid on the education loan for 6 years, and not 8 years.
What happens if you loan tenure exceeds 8 years? If that happens, then you cannot claim a deduction for the interest paid beyond the 8th year. Either which way, it is always advisable that an education loan is paid within eight years.
Do remember the education loan rate may be lower than any other loan like a personal loan. Also, the loan tenure in case of a personal loan is maximum 5 years. So, personal loan EMI will be higher than an education loan EMI even if both loans are of same interest.