Article Details

All about tax benefit on Education Loan
TAX TALK-10.04.2017-THE HITAVADA
 
TAX TALK
 
CA. NARESH JAKHOTIA

Chartered Accountant

 
All about tax benefit on Education Loan
 
 
Our progress as a nation can be no swifter than our progress in education. The human mind is our fundamental resource. – John F. Kennedy on importance of education in the growth of Nation.

 
 
Query 1]
One of my friends had taken an education loan in FY 09-10 for MBA & got employed in a Limited Company in FY 2012-13. He has not paid any installment on loan till now. My query is: if he pays all the installments in FY 17-18 then can he claim deduction for interest which he has not claimed in the previous years till now on education loan, u/s 80E? He wants to take another loan for the education of another son. In whose name the loan should be availed (himself or his son)? Whether the deduction would be available if education is done abroad? Is there any restriction on the amount of interest eligible for deduction (Rs. 40,000/- or so)? Whether principal repayment is also eligible for tax benefit? Please advice. [adityapatel025@gmail.com]
Opinion:
 
Our progress as a nation can be no swifter than our progress in education. The human mind is our fundamental resource. – John F. Kennedy on importance of education in the growth of Nation.
 
 
Education loan carries a tax benefit U/s 80E of the Income Tax Act-1961. It is subject to various terms & conditions as under:
  1. Deduction U/s 80E is available only against the interest on loan taken for higher education. Education Loan could be availed not only for college fees but can also include amount towards incidental & ancillary expense like hostel, meals expenses, transportation etc.
  2. Deduction is available only to an Individual who has taken the loan and not to any other person. (HUF cannot claim deduction by making the repayment of the loan taken for education of its members). Deduction is available towards the education loan taken for his own higher education or for the higher education of his relatives. “Relative” here means spouse & children of the individual. Even legal guardian of student can claim the deduction u/s 80E.
  3. The loan has to be availed from the specified financial institution or approved charitable institution for the higher education. Financial institution, for the purpose, means a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf. HDFC Ltd & Credila Financial services private limited are notified financial institution for the purpose of section 80E. It may be noted that deduction u/s 80E is available only when the Education Loan is availed from specified lenders & no deduction is available if the loan is taken from family, friend or employer, employee co-operative society or from other private sources.
  4. The higher education means any course of study pursued after passing senior secondary examination or its equivalent from any school, board or university recognized by the Central Government or State Government or local authority or by any other authorized authority.
  5. If all above conditions are satisfied, entire amount of interest paid would be available as deduction. There is no ceiling for deduction under Section 80E. (Prior to 1st April 2006, there was a ceiling of Rs. 40,000 for deduction under Section 80E). Currently the entire amount of interest paid during the year is eligible for deduction.
  6. The deduction would be available from the year in which individual starts paying the interest and seven subsequent assessment years. Deduction u/s 80E is available for 8 years or until the loan is repaid fully, whichever is earlier. First year starts from the year in which interest payment starts. If the loan repayment stretches beyond 8 years, no benefit is available from 9th year onwards. It may be noted that it is not compulsory to complete the higher education for claiming deductions u/s 80E. However, for optimum utilization of tax benefit, taxpayer should complete the repayment of education loan in 8 years time frame.
  7. No deduction towards the repayment of the principal portion of the loan is available as deduction. Deduction available if interest is paid during the previous year and was paid out of income chargeable to tax. If the repayment is done from income not chargeable to tax than deduction will not available.
  8. There is no condition that the course should be done in India.
 
Coming to two more specific issue raised in your queries,
  1. Whether earlier years interest can be claimed as deduction: 
    If borrower pays the earlier years interest along with current year interest then he can claim deduction u/s 80E for all the years. Deduction will be allowed only when actual interest is paid. If interest on education loan is not paid then no deduction is admissible in the year of accrual (i.e., the year in which it is due).
  2. Who should borrow the loan & when interest repayment should start (during continuation of loan or after completion of education):
    In general, repayment of principal & interest of education loan is deferred till completion of education on the simple logic that an individual is expected to have regular income source only after  completion of education & so moratorium of few months after completion of higher education is provided for both, principal and interest. From taxation perspective, it is advisable to defer both principal & interest payment till borrower starts earning income. Eight years deduction period is reckoned not from the year in which education is completed but from the year in which interest payment starts. However, the bank also gives an option to serve interest on monthly basis as and when it is charged in the loan account. If borrower starts making interest payment during the education period itself (even when education is not completed), he may not have any taxable income so as to avail the tax benefit u/s 80E. In short, in order to maximize tax savings u/s 80E, it is better to go for option to defer interest payment till completion of education.
    [However, education loan can also be taken for the education of children or spouse in which case person taking the loan may already have regular taxable income. In such case, suggestion from tax planning angel would be exactly opposite to what is mentioned above. In above case, loan is considered for self education wherein borrower may not have any taxable income till completion of education. However, when borrower is availing Education Loan for the higher education of spouse or children, he may be having existing settled income source. By starting the payment of interest immediately after loan availment would result in instant reduction in the tax liability & there is no sense in delaying the deduction benefit in such cases.]
 
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square, NAGPUR-08 
or email it at nareshjakhotia@ssrpn.com].

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