An education loan or student loan is taken for high educational purposes from the banking institution for pursuing a career goal. This loan can be taken for any course that an individual wish to take after completing class 12 or the equivalent.
Similar to any other loan, once the student starts earning, they can start the repayment of the loan amount to the bank and are also charged interest on the amount financed.
The interest amount is tax-deductible, however, some things you must note are mentioned below:
- The provision for this tax exemption on a student loan is based on Section 80E, Income Tax, 1961.
- The entire amount of interest of the student loans repaid is deductible when calculating the taxable income. There is no restriction for the grant of deduction pertaining to the interest on the loan for the higher education course. There is no restriction on the interest rate that is allowed as a deduction
- The tax benefit can be only available on the interest amount of the loan. Therefore, the principal amount can be claimed for any tax benefit.
- Income tax can only be claimed by an individual under the clause that the loan has been taken in their name.
Claiming the deduction
Only an individual can claim this deduction, it is not available to HUF or any other kind of taxpayer. The loan taken should be for higher education to self, spouse or children or for a student for whom the person is a legal guardian.
It is very easy for the parents to claim this deduction for student loans obtained for the higher education of their children
The deduction allowed is the total interest part of the EMI paid during the financial year. There are zero limits on the maximum amount that is permissible as a deduction. However, you need to procure a certificate from the bank. A certificate like this should segregate the principal and the interest portion of the education loan paid by you during the financial year.
The entire interest amount is allowed as a deduction, on the other hand, there is no tax benefit allowed for the principal repayment amount.
The deduction for the interest on student loans starts from the year in which the repayment of the loan has been started. It is only available for 8 years starting from the year in which you start repaying the loan or until the interest is fully repaid whichever of the two is earlier.
This concludes that if the complete repayment of the loan is done in 5 years only, the tax deduction amount will be allowed for 5 years and not 8 years.
It is also necessary to note that if your loan tenure exceeds 8 years, then you cannot claim a deduction for the interest paid beyond 8 years. Hence, it is always advisable that an education loan be paid within 8 years.