The provisions of Section 80E of the Income Tax Act, 1961, specifically caters to educational loans. This section offers deductions which apply to the interest component of these loans. Moreover, these deductions can only be claimed by individuals once repayment for said loan has started. Taxpayers can avail these loans for themselves or on behalf of their children, spouse and students who are their legal wards.
For instance, let’s say Ram had taken a loan for higher studies and is now paying back the loan amount in EMIs. He will be able to claim 80E deduction, which is offered on the interest components of EMIs.
Eligibility Criteria for Tax Deduction under Section 80E
Individuals need to meet certain eligibility criteria to claim tax deductions under Section 80E of Income Tax Act:
- Only individuals who have availed loans under their names can claim tax exemptions.
- These tax deductions can only be availed by individuals. Hindu Undivided Families (HUF) and companies are not eligible to avail these tax exemptions. It is also important to note that these loans have to be availed from recognised financial and charitable institutions. Therefore, provisions of 80E will not be applicable to loans from friends and relatives.
- Deductions under 80E of Income Tax Act can be availed by taxpayers for a period of only 8 years.
- Both parent and child under whose name a loan has been sanctioned can avail the benefits of such deductions.
- One can claim such deductions only on the interest component of the loan availed.
- Such deductions can only be claimed by taxpayers who have taken loans solely for the purpose to fund higher education.
Taxpayers have to keep these documents handy to claim tax deductions under Section 80E:
Individuals availing a loan for higher education have to procure a certificate of the same from a financial institution or charitable institute that has provided this loan. This certificate must represent proper bifurcation of principal and interest amount of the loan which has been availed for the financial year.
Period of Deduction
These deductions on the interest portion start from the year in which a taxpayer starts repaying the loan amount. However, once an individual starts the repayment, he or she can avail deductions under Section 80 for a period of 8 years or until the interest amount is fully repaid (whichever is earlier).
Hence, if a taxpayer repays the full loan amount within a period of 5 years, tax deductions can be availed for a period of 5 years only. For example, let’s say Rohan had availed an educational loan for higher studies and he started repaying the same from 2019. He’ll be able to claim tax deductions on the interest portion of the EMIs from the same year.
If he repays the loan amount by 2027, i.e. 8 years, he can claim the deductions throughout the whole repayment process. However, if he pays off the full loan amount by 2024, he will only be able to claim deductions for 5 years only and not 8 years.
Amount of Deduction under Section 80E
As mentioned above, the provisions under Sec 80E of Income Tax Act,1961 allows individuals to claim deductions only on the interest component of the loan availed for higher studies. Hence, no tax exemptions can be claimed by taxpayers on the principal part of the loan amount.
However, these deductions can only be availed during the years in which interest is paid on the loan amount. Further, there is no maximum limit attached to the deduction amount.
Tax Benefits Associated with Section 80E
An individual who has availed a loan for higher education can enjoy various tax benefits as per the provisions of the Income Tax Act. Suppose a taxpayer has already claimed the maximum amount of deductions (Rs. 1,50,000) available under Section 80C. He or she will still be eligible to avail 80E deduction as there is no ceiling attached to the deductions.
Benefits of Paying off Education Loan Early
There are many individuals who would prefer to pay off their education loans by utilising the full 8-year repayment period to avail the deductions. These individuals choose to invest the surplus amount of their income without utilising it to pay off the loan amount. They often decide to stretch the repayment period for as long as 8 years to derive maximum tax benefits.
This strategy is ideal for those individuals who feel that they might be able to maximise their income by investing the excess amount and not use it to repay EMIs. However, if an individual pays off the loan amount as early as possible, he or she can be free of the burden of EMIs and avoid falling into a debt trap.
Having a decent track record of credit repayment also has a positive impact on the credit score of individuals. This helps them to avail financial assistance conveniently from lenders in future.
Education loans are made easily available to everyone so that more individuals can pursue higher studies. Additionally, the provisions of Section 80 of the Income Tax Act enable them to avail tax benefits on the repayment of their student loans. However, it is essential for one to decide if he or she would stretch the repayment period or pay off the amount as early as possible.