Introduction:

Education loans serve as highly beneficial financial tools for managing expenses associated with higher studies or foreign education. Additionally, they can lead to substantial income tax savings.

If you are repaying an education loan, you are eligible to claim tax deductions under Section 80E of the Income Tax Act. The subsequent sections provide a comprehensive overview of Section 80E.

Section 80E: 

Section 80E of the Income Act allows individuals to claim a deduction on the interest paid on educational loans. Taking an education loan for your spouse, children, or adopted children qualifies for tax deductions under Section 80E, provided the loan is obtained from a financial institution or a charitable organization. A financial institution is defined as any bank operating under the provisions of the Banking Regulation Act of 1949, while a charitable organization is an entity listed in Clause 23C of Section 10.

As per Section 80E, the tax deduction is only applicable to the interest component of the EMI that you pay.

Eligibility Criteria:

To qualify for a tax deduction under Section 80E, you must meet the following criteria:

• You can only claim this deduction for loans taken for higher education or foreign education.
• This tax benefit is available only to individuals and not to Hindu Undivided Families or companies.
• Tax deduction under this section can be claimed by both parents and children, allowing the person responsible for repaying the loan whether the child or the parents to avail of tax deductions.
• You cannot claim deductions for education loans obtained from friends or relatives.

 Deduction Amount :

• The entire interest paid towards the education loan in a financial year is eligible for tax deduction under Section 80E of the Income Tax Act. There is no maximum limit on the amount that can be claimed as a deduction under Section 80E. However, you must obtain a certificate from your financial institution.

• The certificate  must include details of both the interest and principal components of the education loan for a specific financial year.

Deduction Period of section 80E:

• The tax deduction for the interest you pay on an education loan begins as soon as you start repaying your loan. However, you can only avail of this tax benefit for eight years from the year you commence repayment or until you repay the entire interest amount, whichever comes first.

• If you repay the education loan within 6 years from the start of repayment, the tax credit would only be available for those 6 years. Borrowers should note that although repayment may take more than 8 years, after the eighth year they will not get tax benefits under section 80E.

Tax Benefits : 

• However, the notable aspect is that you can claim deductions even above the maximum benefit of Rs. 1,50,000 is available under section 80C.

• You can claim a tax credit on the amount paid as tuition fees under section 80C, education  loan interest deduction under section 80E..

• If you’ve taken an education loan for yourself, your spouse, children, or anyone for whom you’re a legal guardian, you can claim this deduction. If you share the EMI payments with your parents, they can claim deductions for the interest portion they’re paying. You can claim benefits for the remaining portion of the EMI’s interest component, provided both parties meet all necessary conditions.

Documents Required to claim Deductions:

You can claim tax deductions under Section 80E of the Income Tax Act when filing your ITR. You are not required to attach any documentary proof to avail of this deduction. However, it’s advisable to keep certain documents readily available in case the IT Department requests them for scrutiny.

• Sanction documents for the education loan
• Repayment statements from the lending organization, detailing a clear breakdown of principal and interest amounts of the EMI for a specific financial year, are required.

Conclusion : 

An education loan is a popular financial solution individuals often choose to fund higher studies for their children or dependents. You can readily claim a tax deduction for the interest paid on such education loans under Section 80E of the Income Tax Act. However, ensure you meet specific eligibility criteria to qualify for these deductions.