Tax Benefits on Securing Education Loan

Many students take loans to fund their education and if you’re one such student you certainly must be aware of the tax benefits of securing an education loan. Education loans are also referred to as student loans as they are taken to finance higher education. Though they come with many advantages, there are also a few disadvantages, which may or may not affect your decision to take a loan for your education. In order to clearly understand the pros and cons of securing an education loan, continue reading this blog. 

Who is eligible for an Education Loan?

An education loan is long-term debt and the eligibility criteria for taking one can be different from one bank to another. You can choose either to pay the loan in 10 years or opt for repayment in 15 years. The interest rate on education loans is between 9% and 13%. To avail of this loan, you need to have secured HSC with a minimum of 50% marks. If you are an NRI, you will also require a valid passport from the country of residence. Both Indian citizens and NRIs can apply, but a valid passport is a must for the latter. Here are some common eligibility terms for taking an education loan. 

• You need to be over 18 years of age
• The co-applicants need to have a regular source of income
• The applicant needs to have secured HSC with a minimum of 50% marks
• Students should be studying in an approved institute with valid documents such as admission letter, fee schedule or prospectus, or self-attested copies of these documents. 
• An applicant can avail maximum loan amount of Rs 30 lakhs per family towards study in any course or programme offered by an approved institute in India

Also Read: What is the Student Loan Eligibility Criteria for Studying Abroad?

Documents Required for Education Loan

The following documents are required to apply for an education loan. Without complete documentation, you may not be eligible for any type of education loan.

• Income statements (Salary slip, Form 16, Income-Tax Returns of the last 2 years, and Computation of income of last 2 years certified by a Chartered Accountant)
• Bank Statement/Pass Book of last 6 months
• Copy of the admission letter of the Institute along with the ‘fee schedule’
• Mark sheets and/or pass certificates of SSC, HSC, Degree Courses, National level entrance test
• Age proof (birth certificate, passport, Aadhaar, PAN card, driving license)
• Address proof (Aadhaar, passport, latest electricity bill, latest telephone bill, ration card, existing house lease agreement, bank account statement)
• Photo identification proofs (Aadhaar, voter id, PAN card, passport, driving license)
• Passport size photos of the applicant and co-applicants
• Guarantor form (optional).

Also Read: Expenses covered in Education Loan

Additional Documents in case of Work experience

• Recent salary slip: This verifies your source of income, which is an important factor in determining your eligibility for this loan. 
• Details of other assets like bank deposit passbooks .
• Mutual Fund statement: You need to show that you have savings or any other investments as well as a steady income. This will help you to take a higher amount from the bank and also manage repayments easily. 
• Occupancy certificate: This certificate is issued by the local authority stating that the applicant (you) has been living in the house.
• Deed or rent agreement: This proves that you have some fixed assets which can be used for collateral against the loan should you fail to make timely payments in future. Your eligibility is decided after this requirement is met. 

Also Read: Everything About Education Loan for MS

What is section 80E?

80E section under the Income Tax Act enables you to claim a deduction for the education loan you have taken from a financial institution or any other approved charitable institution. However, you can only take tax deduction for the interest paid on the loan.

Provision under Section 80E

The interest paid on an education loan is eligible for a tax benefit under Section 80E of the Income Tax Act. This means that it can be set off against total income earned during a financial year; thus, reducing overall taxes payable.

Eligibility for Tax Deduction under Section 80E

• Only individuals are eligible for tax deductions, Hindu undivided families (HUF) and companies cannot avail deductions under this section. Also, loans taken from friends or relatives are not eligible under this section. In other words, the person who pays the loan shall be able to claim deduction under section 80E.
• A parent can claim this tax deduction if he/she has availed a loan for his/her child’s higher education. It means that one can get a deduction even if he/she is not liable to pay taxes (i.e., salaried employee). However, he/she must be paying the loan with his own income and not using someone else’s funds.
• In order to claim deduction under this section, one should be paying interest on only educational loans taken to finance higher education. The deduction can be claimed only during the period when you are pursuing higher studies

Documents Required 80E

• Income Tax Return (ITR) Form
• Form 16B – This form will be issued by the lender to every borrower after making deduction of TDS from the loan amount. Every borrower must submit this form along with his/her ITR form. In case of non-submission of this form, there might be a delay in processing your ITR.

Also Read: Types of Education Loan for Indian Students

Tax benefits on Education Loan

There is a common misconception that taking an education loan attracts tax. However, it is not the case. If you are pursuing a full-time or part-time course at a recognised institute and taking an education loan to fund your study, then you can claim income tax benefits on principal paid and interest component up to Rs 1 lakh. Here’s why you can do that.

• Section 80E of the Income Tax Act offers tax deductions on the amount of interest paid towards education loans. However, the I-T department has clarified that the principal amount paid throughout the loan period is not eligible for deduction under this section.
• This section is applicable for all kinds of education loans, such as those taken for higher education, professional courses, and even vocational courses. As long as the loan is taken from a bank or a registered financial institution, it is eligible for this benefit. The limit of eight years is also applicable in case of education loans.
• The best feature of this tax benefit is that there is no cap on the interest rate which qualifies to be deducted. This means that if your interest rate is 11 per cent and you pay Rs 50,000 as interest in a particular year, you can claim deduction up to maximum Rs 54,250 that includes both principal and interest components.
• The income tax benefit can be claimed in the year in which you paid the principal amount as well as interest component. However, if you have not claimed the income tax benefits in earlier years, you can carry forward the benefit and claim it in a subsequent year. For example, if you studied in 2015-16, you would be eligible to claim income tax benefit for both 2016-17 and 2017-18. You need to submit Form 16B or Form 16C along with your ITR. 

Amount of Deduction Under 80E

There is no limit on the deduction amount. The deduction benefit is available for max. 8 years or till the interest is paid. This is applicable even if you have taken an education loan for your children, spouse, or as a guardian for a student. It is advised to wind up you r education loan during the period of 8 years to avail the maximum benefit of section 80 E

Also Read: Loans to Study Abroad

Education loan Tax Exemption Calculator

You can check your education loan tax exemption using Tax Benefit Calculator

TDS on Education Loan Interest

There is no TDS deduction made on the interest paid on an education loan. However, you should keep in mind that only the interest paid during the financial year qualifies for this deduction. You will not get any benefit if you pay the entire outstanding balance of your loan in a single payment at the end of the year. 

Getting a higher degree is an investment that can fetch you more returns in the long run. To help you get one, educational loans are available to most students who apply for a loan. You can connect with us at Leverage Edu and our counsellors can help you with the loan process further by making your overseas education journey much easier.