Education Loans and Tax Relief: What you need to know about section 80E

With an economy rapidly growing, education expenditures have gone up manifold. Higher education has become a costly affair for middle-class families in India. As education costs have skyrocketed at home and abroad, education loans now represent a survival option for students.

However, the good news is that such loans enable students to pursue higher education and provide some comfort with tax exemptions. The interest component of the loan is exempt from tax under Section 80E of the Income Tax Act. This deduction takes the burden away from the shoulders of students and their families.

Let’s explore section 80E of the Income Tax Act further and learn how to use it to reduce tax liability while funding an education.

What Does Section 80E of the Income Tax Act Mean?

Section 80E of the Income Tax Act deducts tax on the interest of education loans, which applies to people seeking higher education. Section 80E permits the individual to lower his tax liability based on the interest component of the EMI loan, leading to savings as a whole.

However, the Section 80E deduction only applies to interest, not principal. The most important thing to consider here is that it is permissible for eight consecutive years from the initial year of commencement of repayment of interest.

This loan encourages tax savings and discourages people from borrowing from others by facilitating easy access to higher education in the country and overseas.

Eligibility Criteria/Applicability of Tax Deduction under Section 80E – Who Can Claim Education Loan Deduction?

Here are some conditions:

• Name of the Borrower: The borrower should have taken the education loan in his or her name or in the name of the spouse, children, or legal ward. The parent or the child is eligible for the deduction if it has been taken in his or her name and service.
• Source of Loan: The loan should be raised from a registered financial institution or charitable trust. A loan borrowed from an employer, friend, or relative cannot be deducted.
• No corporate claims: This deduction is not allowed for HUFs or companies but only for individual taxpayers.
• Purpose of the Loan: The loan must be borrowed for either higher education in India or abroad. Higher education would imply education after passing the senior secondary exams.
• Applicability under the old tax regime: The deduction applies only if the individual follows the old tax regime. The new tax regime has not introduced such benefits.

Difference Between Section 80E vs Section 80C

Though both sections 80E and Section 80C offer a tax benefit, they cater to different aspects. An important point is that the 80E deductions exceed the 80C deductions. Let’s compare them in brief:

• Section 80E: The interest income of an education loan is allowed as a deduction. The amount repaid towards the principal is not permitted to be deducted.
• Section 80C: Repayment of the principal amount in a home loan, life insurance premium, and specific investment instruments are allowed as deductions but not on the education loan.

Key Highlights of Tax Deductions Under Section 80E of the Income Tax Act

Here are some significant features and highlights of this section that one must understand thoroughly:

1. Maximum Deduction and Period

Section 80E allows individuals to claim the tax deduction for eight years or until the interest is completely repaid, whichever is less. That means that even if the loan tenure is over eight years, they cannot claim a deduction beyond that period.

Also, like in the case of other deductions, there is no cap on how much they can claim; the entire interest paid during the eligible period qualifies for tax exemption.

Let us take an example:

Mr. Sujoy’s gross taxable income is Rs 8 lakh, and he has paid Rs 2,00,000 as the interest component of his education loan. In this case, his tax incidence reduces to Rs 6 lakh. Based on his income bracket, this can attract considerable tax savings from his pocket.

2. Impact of the New Tax Regime

The new tax regime offers a lower tax rate but has relieved most of the deductions, including Section 80E. One cannot avail of the education loan interest deduction at all when he/ she opts for the new tax regime. That, however, is not the case for those opting for the old tax regime wherein the provisions of Section 80E remain available for them.

3. Documents Needed to Avail Deduction Under Section 80E

Proper documentation regarding the education loan is essential to claim the tax deduction under Section 80E. No supporting documents have to be attached to the income tax return. However, the following papers are required, which can be used for verification by the Income Tax Department:

• The loan sanction documents issued by the financial institution or charitable organisation from which the loan was taken.
• Repayment statements from the lending bank showing explicitly and separately the interest payable and principal payable during a financial year.
• An interest certificate from the bank or financial institution specifies the total interest paid during any financial year.

These would now become proof of the interest paid, making claims seamless in case of an audit or inquiry by the taxman.

4. Claiming the Deduction Under Section 80E

A deduction for interest payable on an education loan is allowed under Section 80E only when it is established that repayment has commenced. That means the borrower can claim the interest paid in the particular year as he files his income tax return.

Borrowers must hence adopt the following steps for its easy process:

Step 1 – Keep proper and reliable records of the amount of interest paid.

Step 2 – Interest and principal breakup certificate issued by the lending institution

Step 3 – Details could be submitted while filing the income tax returns for that year.

Strategic Early Repayment of Education Loan

Most borrowers pay off their education loans over the entire 8-year repayment period. This is because this term is the maximum period under Section 80E to be eligible for tax benefits.

Rather than paying off the loan with surplus funds, smart borrowers look to invest their surpluses and earn a better return.

Let us look at the tax slab:

When a person starts his career, most initially fall under lower tax slabs because they have less income. However, as their career advances and their income increases, they tend to move to higher tax slabs. Here’s how tax slabs will be for someone in the early years of his career or after some years of professional growth in India:

Early Years of Career

Salary will generally come in the lower range for freshers entering the job market. This means that any new graduate will land up in one of the brackets of the lower tax paying. Example:

• 2.5 lakhs income per year: No tax (0% tax rate)
• 2.5 lakhs to 5 lakhs income per year: 5% tax rate

They would have still paid very little or nothing with the usual deductions, as rebates under Section 87A are available.

After 5 Years of Professional Growth

People tend to be promoted in their jobs and be paid more after acquiring appropriate experience. They would get pushed into higher tax slabs because of this:

• Income between ₹5 lakhs to ₹7.5 lakhs per annum – 10 % taxation
• ₹7.5 lakhs to ₹10 lakhs per year income – Tax rate is 15%
• ₹10 lakhs to ₹12.5 lakhs per year income – Tax rate is 20%

Going by these, as they climb higher on their tax slab, the amount of taxes they pay goes up substantially. Thus, the benefits of this section 80E will be all the more valuable if they still have education loan interest payments to reduce.

However, this is suitable for borrowers with surplus income who can afford to offset the interest cost while earning extended tax benefits. Repaying the education loan after eight years helps individuals with surplus finances and increases their future capabilities to secure larger loans, such as buying a house.

Benefits of Early Education Loan Repayment

There are several benefits associated with the early pay-off of an education loan. Those benefits include the following:

1. An early loan repayment saves one from the burden of monthly EMI.
2. The more time an education loan is retained, the more interest one would incur.
3. Foreclosure of an education loan is viewed as a good financial lifestyle, which means having an improved credit rating.
4. The longer it takes to pay out the loan, the more the interest rate will be paid, thereby increasing the debt burden. Paying early reduces a potential debt trap.
5. It will also give borrowers a chance to amass wealth through investment and enjoy the benefit of tax-deductible payments for a longer period.

Conclusion

Education loans are a significant financial decision that promotes higher education and allows considerable tax deductions under section 80E against interest paid. The government has taken several measures to make education loans accessible.

This guide covers the eligibility, time limits, and documentation of deductions under Section 80E of the Income Tax Act. This deduction eases the cost burden on individuals repaying education loans and lets them concentrate on pursuing educational ambitions.

FAQs

 1. What is Section 80E of the Income Tax Act?

Under Section 80E of the tax code, people can deduct the interest paid on student loans for higher study. This deduction can be taken for a maximum of eight years or until the interest is paid in full.

2. Who is eligible to claim the deduction under Section 80E?

Individuals who have taken an education loan in their name or the name of their spouse, children, or legal wards can claim the deduction. The loan must be obtained from a registered financial institution or charitable trust for higher education in India or abroad.

3. Can I claim a deduction for interest and principal repayments under Section 80E?

No, Section 80E only allows for the deduction of interest paid on the education loan. Principal repayments do not qualify for tax deductions under this section.

4. What documentation do I need to claim the deduction under Section 80E?

To claim the deduction, you should maintain the following documents: loan sanction documents, repayment statements indicating the interest and principal breakdown, and an interest certificate from the lender detailing the total interest paid in a financial year.

5. How does the new tax regime affect deductions under Section 80E?

Under the new tax regime, individuals cannot claim the deduction for education loan interest under Section 80E. This deduction is available only for those opting for the old tax regime.

Disclaimer: The information provided is for informational purposes only. Any mistakes, omissions, or results from using this information are not PowerUp Money’s responsibility.