Deduction U/S 80E : Interest on Education Loan

Deduction U/S 80E : Interest on Education Loan

Keeping in mind highly competitive job market in India and across the globe, many of us prefer to enrol for higher education to add extra feathers to our cap. However, considering rising cost of good quality education, one may prefer to take education loan to fund additional cost of higher studies. If you are one such person, section 80E of Income Tax Act, 1961 can bring some tax relief for you.

Section 80E deals with deduction from gross total income in respect of payment of interest on loan taken for higher education for self, spouse, children or a student of whom you are legal guardian.

Extent of Deduction: There is no upper limit for amount of deduction. However, following condition must be satisfied.   

Only the interest component of the loan can be claimed as deduction.

The amount of interest claimed as deduction must have been paid during the previous year by the assessee from the income chargeable to tax.

No Tax benefit is allowed for the principal repayment.

Eligibility to Claim Deduction:   

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Deduction under this section can be claimed by individuals only. No other type of assessee can claim deduction under this section.

Education Loan must have been taken by the assessee from any financial institution or any approved charitable institution for the purpose of pursuing his higher education. Any loan taken from relatives or friends shall not be valid for claiming deduction.

Educational Loan should have been taken for the purpose of pursuing higher studies of Individual, Spouse, Children of Individual or of the student of whom individual is legal Guardian. Hence parents are also eligible to claim deduction of interest paid by them on loan taken for their children’s education.

Education Loan must have be taken in the name of such assessee who is claiming the deduction under this section. If your parents have taken loan for your higher studies, you cannot claim deduction under this section.

Tenure of Deduction:   

Deduction for interest paid on education loan can be claimed maximum up to 8 assessment years.

If loan is repaid before completion of 8 assessment years, deduction can be claimed only for the actual number of years taken to repay the loan.

If it takes more than 8 assessment years to repay the loan, deduction can be claim for up to 8 years only.

Documents Required:  

Certificate from your Bank / financial institution or approved charitable institution from whom such education loan is been taken.

Such certificate should segregate the principal and interest portion of the education loan paid by you during the financial year.

Important Definitions: Approved Charitable Institution: 

“Approved Charitable Institution” means an institution established for charitable purposes and approved by the prescribed authority section 10(23C), or an institution referred to in section 80G(2)(a).

Financial Institution: 

“Financial Institution” 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.

Higher Education: 

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“Higher Education” means any course of study pursued after passing the 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 authority authorized by the Central Government or State Government or local authority to do so.

Definition of Higher education is substituted by making a amendment as per Finance (No. 2) Bill 2009. After the amendment Higher education would means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central Government or State Government or local authority or by any other authority authorised by the Central Government or State Government or local authority to do.

So Higher studies include all the fields of study pursued after passing the senior secondary examination or its equivalent exam. It includes both the Vocational courses as well as the regular courses.

Initial Assessment Year: 

Initial assessment year means the assessment year relevant to the previous year, in which the assessee starts paying the interest on the loan.