Education Loan Tax Benefit option (Section 80-E)

Table of Contents

  1. What is the tax benefit of an education loan?
  2. What is Section 80E of the Income Tax Act, 1961
  3. Claiming Tax Benefits on Your Student Loan: Eligibility
  4. How to avail tax deductions under Section 80C?
  5. Education loan option tax exemption limit under Section 80E
  6. Is early repayment of an Education Loan option advisable?
  7. Frequently Asked Questions

Due to the outstanding quality of education, abundant choices, and a high standard of living, an increasing number of students are choosing to pursue higher education abroad. Whether for bachelor’s, master’s, or diploma programs, international universities provide numerous options across various subjects. 

To finance their international degree, aspirants studying abroad opt for student loans designed for overseas education. An education loan option proves to be an excellent choice as it covers the entire cost of foreign education. Another advantage is that borrowers can avail of a deduction under section 80E of the Income Tax Act 1961, specifically tailored for education loan option income tax benefits.  

What is the tax benefit of an education loan?

Tax benefits serve to alleviate your financial burdens. The term “tax benefit” encompasses any legal provision that allows you to reduce your tax liability, provided you meet specific eligibility criteria. These benefits can take various forms, including deductions or credits. 

These tax advantages are applicable in both India and the USA. When calculating taxable income, the interest paid on your education loan option can be deducted from your gross taxable income. 

Tax benefits can be especially advantageous for co-borrowers in the early stages. Additionally, if the student opts to work in India after completing their education, they can certainly avail of the tax benefit. 

What is Section 80E of the Income Tax Act, 1961:Tax Benefits on INR Education Loan

Section 80E of the Income Tax Act, of 1961, establishes a provision enabling individuals to seek a deduction on the interest paid for educational loans. This section aims to offer financial relief to taxpayers who have borrowed funds for their own, their spouses, or their children’s higher education. 

The deduction is applicable solely to the interest component of the INR educational loan, with the principal repayment not qualifying for this education loan option interest tax benefit. To be eligible, the loans must be obtained from recognized financial institutions and charitable organizations, excluding loans from friends or relatives. 

Claiming Tax Benefits on Your Student Loan: Eligibility

Section 80E of the Income Tax Act offers a helping hand to those who take out education loans, but specific criteria must be met to claim the tax deduction: 

Who can claim? Individuals only: Only individuals who have taken an education loan option in their own name can benefit from this deduction. This excludes Hindu Undivided Families (HUFs) and companies.
Loans from recognized institutions: The loan option must be obtained from a recognized financial institution or a charitable trust, not from friends or relatives.
What types of loans are eligible?  Loans for higher education: The deduction only applies to loans taken solely for pursuing higher education, not for other purposes.  
What can be deducted?  Interest only: You can only claim a deduction on the interest, not the principal amount, paid towards your education loan.  
How long can the deduction be claimed?  Limited period: The interest on education loan option deduction limits available for a maximum of 8 years from the year you start repaying the loan.  
Who else can claim the deduction?  Coborrower and student: Both the parent who took the loan option and the child for whom the loan option was taken can claim the deduction, providing flexibility and support.  

How to avail tax deductions under Section 80C?

You can easily claim deductions under Section 80C by following these steps: 

  • Specify the interest amount paid on the education loan option while filing your Income Tax Return (ITR) during the financial year. 
  • Interest certificates will be provided to them by their respective loan providers. The bank’s certificate typically contains this information, which outlines the amount eligible for an education loan interest rebate in income tax. 
  • Salaried individuals utilizing an education loan option can inform their company’s Accounts Department to promptly adjust the TDS deducted. 
  • If the TDS deduction is not adjusted, applicants can apply for a refund when filing their ITR. 

Education loan option tax exemption limit under Section 80E

The interest portion of an education loan option qualifies for deduction from your income, akin to deductions under Section 80C and Section 80D, which are subtracted before arriving at your total taxable income for tax calculation.  

Unlike other sections, Section 80E does not impose a specific limit on the exemption amount for which you can claim a deduction. Any sum paid as interest in a financial year is eligible for deduction, regardless of the actual amount. 

For example, through the education loan option tax exemption calculator, if your gross taxable income, following other deductions, is Rs 6.7 lakh, and you repay Rs. 2,00,000 as the interest component of the education loan, your total income for tax calculation would be Rs 4.7 lakh, and taxation would be applied accordingly. 

Is early repayment of an Education Loan option advisable?

Some borrowers opt to utilize the full 8-year repayment period for their education loan. This choice is often made to invest their surplus funds instead of repaying the loan option promptly, allowing them to leverage the entire repayment period and claim the education loan option tax benefit. This strategy proves beneficial for those confident in their ability to earn more through investments than the loan option interest. 

If you believe you can generate higher returns by investing your surplus funds, adopting a similar approach might be suitable. Alternatively, repaying the loan option as early as possible ensures you become debt-free and establishes a commendable education loan option repayment tax benefit track record. This, in turn, enhances your prospects of securing a larger loan option in the future, facilitating more convenient home purchases when the need arises. 

Don’t let financial limitations hold you back. Explore student loan options today with a professional from Nomad Credit! 

Frequently Asked Questions

Is the education loan option tax-free?

In many countries, the interest paid on loans is eligible for tax benefits. However, the unique rules and regulations about the tax treatment of education loans vary by country, or even within a country, it may depend on the local tax law.

Which documents are necessary to avail of a deduction under Section 80E?

To claim a deduction under Section 80E, the individual seeking the deduction must furnish a certificate from the financial institution or an approved charitable institution from which the loan option was obtained. This certificate should clearly delineate the principal amount and the interest amount for the education loan option acquired during the specified financial year.

Who qualifies for a tax rebate in India?

Resident individual taxpayers are eligible for a tax rebate under Section 87A of the Income Tax Act when their total income does not surpass Rs. 5 lakhs under the old tax regime and extends up to Rs. 7 lakhs under the new tax regime.

Who is eligible to claim the Tax benefit?

Under Section 80E of the Income Tax Act, 1961, a person who has received an education loan option for higher studies for themselves, their kids, or spouse, or if they’re the legal guardian of the person who has taken the loan, can claim the tax benefit.