Education loans are becoming a necessity to fund high-cost education and there are a lot of banks catering to such needs. These banks offer huge loan amounts, for instance, ICICI Bank Education Loan offers loan amounts up to 1 crore. Such high amounts are indeed helpful but the interest accumulated becomes troublesome.
The large interest is a serious concern, especially for the parents. Often it is observed that the total interest reaches a value equal to more than half of the principal. However, the government has a solution for you. The Government of India introduced the Income Tax Act of India in 1961. Under Section 80E of this act, education loan applicants can claim tax deductions on the interest paid.
An important feature of this act is that there is no upper limit. This means that you can even deduct the entire interest amount from the taxable income. ICICI Education Loan for Abroad offers loan up to 1 crore to fund expensive foreign education. Removing an upper cap comes out as a really big help in such cases.
These benefits have made education loans very attractive choice for funding higher education.
Section 80E of the IT Act, 1961 simply states that if a person has taken an education loan for higher education, the interest amount paid by him in the previous year shall be deducted from his total income chargeable to tax.
Almost all of the courses are eligible under this rule. The course should be pursued after the senior secondary examination is cleared from a recognized school. The school can be recognized by any of the state governments or the central government or local authorities. Apart from that, schools recognized by agencies approved or assigned by the state governments or the central government or local authorities are also eligible.
The official act mentions that the course should be a full-time study of graduation or post graduation in engineering, medicine, management, or post graduation in applied sciences or pure sciences including mathematics and statistics.
According to the rules of this act, any assessee who takes an education loan for his/her own education or for the higher education of his/her child, spouse, or a student of whom the assessee is a legal guardian, is eligible for a tax deduction equal to the interest paid.
According to Section 80E of IT Act, 1961, an education loan taken from any financial institution or an approved charitable institution is eligible for a tax deduction.
Financial Institutions include all the banks in the nation which are regulated by the Banking Regulation Act, 1949.
It includes both government and private banks.
Apart from this, any other institution notified in an official Gazette is also eligible.
Approved Charitable Institutions are those which are established for a charitable purpose and are approved by concerned authorities.
Some of these include Prime Minister’s National Relief Fund; Prime Minister’s Relief Fund for Students; Swachh Bharat Kosh; etc.
Read more about ICICI Bank Education Loan specifics.
Non-financial institutions like NBFCs are NOT included in this. They have not been mentioned in the official gazette and thus education loans availed from them are not eligible for tax deductions. Also, foreign funders are not eligible.
Note: Customers should ask for a copy of the gazette notification from the bank.
According to this rule, the deduction can be claimed in the initial year in which the assessee starts paying the interest and in the seven consecutive years following. Once the full interest value is claimed for the tax deduction, no further claims can be made, even if the full claim is made in the first year only.
People often confuse that the principal amount is also subjected to tax deductions. It is to be made clear, that the amount paid as interest is only subjected to tax deduction claims.