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Education loan and tax savings

An education loan is a loan obtained from a financial institution for the purpose of furthering one’s education in order to pursue a career objective. After finishing 12th class or the equivalent, this loan can be used for any course that individual desires to pursue. When a student begins to make money, they begin repaying the loan to the bank and are levied interest on the money borrowed, just as any other loan.

The legislation for this student loan tax deduction is based on Section 80E of the Income Tax Act of 1961. Only the interest portion of the loan is eligible for the income tax advantage. As a result, the principal amount is eligible for any tax advantage. When determining taxable income, the whole interest amount of returned college loans is deductible. There are no limitations on the amount of interest on a loan for a higher education course that can be deducted. There are no limitations on the amount of interest that can be deducted as a deduction. If a person has taken a student loan to fund higher education for himself, his or her partner, children, or a student for whom he or she is the guardian, he or she can claim a tax advantage. As a result, school loans made for relatives or other dependents are not eligible for the Section 80E benefit. Individuals can claim an income tax deduction if the loan is taken out in their name. This unique deduction is available for students who take out an education loan to study abroad. 

When calculating an individual’s total income under the provisions of this act, any money paid for him or her in the prior period, out of his or her taxable income, as interest on a student loan taken out by him or her from a banking institution or, in some cases, an authorised non-profit organisation to pursue higher schooling or even the college education of a relative for whom they are responsible as a legal guarantor, will be deducted. 

When filling up tax forms and paperwork, a person just has to declare the interest amount¬†they paid on an education loan the previous year. Education loans are usually paid in instalments. The interest from the previous year’s payments must be totalled and reported. This tax deduction only applies to income tax returns; it does not apply to any other taxes paid. The education cess, as well as any other small taxes, are excluded. The tax filing may be done online, and when doing so, make sure to include the amount of student loan interest and any supporting documentation that is required.

When looking to Section 80E for certain specified words, you should be aware of the following phrases:
  1. “Approved charitable institution” is defined in Section 80E as an organisation specified in, or as an institution formed for the purpose of charity and approved by the relevant authority under clause (23C) of Section 10, or an institution or organisation referred to in clause (a) of sub-section (2) of Section 80G.
  2. A “financial institution,” as per Section 80E, is a bank to which Banking Regulation Act of 1949 applies, which include a financial institution or banking institution specified in section 51 of the Act. Any financial institution that the Central Government has specified in the Official Gazette as relevant.
  3. According to Section 80E, “higher education” refers to every study program undertaken by a person after having passed the Senior Secondary Examination (Class 12), or its equivalent, from a school, 10th and 12th board, or university which is recognised either by the Central or the State Governments, 
  4. The “first assessment year” corresponds to the assessment year being relevant to the previous year in which the individual begins paying it back on the education loan, according to Section 80E of the Income Tax Act.
The Benefits of having an education loan are:
  1. You will not have to pay any repayment costs for your college loan if you take out an education loan. In fact, if your bank discovers that you are making timely loan repayments, your interest rate will drop.
  2. These loans are usually quite flexible, which means that the borrower may take their time repaying them as long as they make payments, even if they are tiny. However, if you take longer to pay the full amount, the amount you owe will accrue more interest.
  3. Although student loans do not require any assets, they do necessitate the presence of a guarantor.
  4. Tuition, hostel fees, and travel expenses are frequently paid by loans, depending on the bank’s judgement.
By Siddhant Dutta