Now when the cost of education is only moving upwards, it is constantly worrying those parents who want their children to pursue higher education. To finance the high priced higher education is a matter of concern for all such parents. However the last decade has seen Indian banking industry coming to the rescue of such parents by way of granting education loans. Like the banking sector, the income tax laws have also kept pace with the need of supporting these students and parents. In this article I shall discuss the various aspects of tax benefits surrounding the education loan.
The income tax laws allow you to claim interest paid by you in respect of education loan for higher education against your taxable income without any upper limit. Please note that unlike the [home loan] where interest and principle both are tax deductible here for education loan the deduction is available only in respect of interest and there is no provision in the present law for allowing deduction on the repayment of the principal amount. The deduction can be claimed as and when payment of interest is made whether during the studies or after completion of studies. So you can start repayment of these loans during the period your child is studying or after completion of his studies.
It is important to know that there is no bar on your claiming tax benefits in respect of tuition fee paid out of the education loans taken by you and interest paid on such loan. You can claim both the deductions i.e. deduction in respect of tuition fee under [Section 80 C] and interest on loan taken under Section 80 E for paying such fees simultaneously.
- When and for what period you can claim this deduction?
The deduction is available on the basis of actual payment of interest. Therefore if you pay the interest for earlier years in a single year, you will get the deduction in respect of all the actual interest paid irrespective of the year to which the interest relates. If you are paying arrears of interest, please collect certificate/s mentioning the total amount of interest paid by you during the year from your banker. The deduction for interest payment is available for eight consecutive years. The first year for the purpose of the eight years term shall begin from the year in which you first start paying the interest on such education loan. This year may or may not be necessarily the year after you have obtained the loan. If the repayment of the education loan stretches beyond 8 years, the deduction can be claimed for eight consecutive years only. In case you have decided to opt for moratorium during the education period, the eight year period shall start later. However if you repay the loan before eight years, logically the deduction will not be available once the loan is fully repaid. It is therefore advisable that you should plan to repay the education loan within eight years.
- Which courses qualify for the deduction?
Any education loan taken for pursuing any course after Senior Secondary Examination or HSC as is popularly known qualifies for this purpose. Earlier this benefit was given only for the full- time courses of graduation or post graduation in specified fields like medicine and engineering etc. However the budget of 2009 changed all this and now you can claim the tax benefits even in respect of part-time courses also.
What is required is that the course should be pursued from any Govt. recognized school, board or university, though not necessarily from the institutions run by the Central Government. It may be recognized even by a local authority. Even part- time course or a diploma course shall qualify as course for the purpose of claiming this interest deduction provided the institution imparting such course is recognized.
The deduction for [tuition fee] in respect of two children is available under Section 80 C if the education institution is situated in India. However the interest deduction for education loan can be claimed even if the study is pursued outside India.
- Who can claim the benefit and for whom?
The benefit is available only to an individual and is not to HUF unlike many income tax benefits which are available to individual and HUF both. Earlier the law provided for deduction of interest only to the person who had taken the loan for his own studies. This was amended in the budget 2007 and since then you can claim deduction if the loan has been taken for study of yourself, spouse, child or any other child for whom you are a guardian but not for your siblings.
It is advisable to claim the benefit of interest for such loan in the income tax returns of the person who falls in the higher tax slab. Generally it would be the parents of the student who normally fall in the higher tax slabs as it is highly unlikely that the person for whose education this loan is taken falls in the higher slab. The parents can take the benefit of interest deduction in case the interest is agreed to be paid during continuance of the education. In case the person for whom the loan is taken falls in higher tax slab, he can pay the interest and claim it in his income tax returns. Therefore it is advisable to take an education loan in joint names of parent and the student so as to have the flexibility for claiming the interest.
- From where to borrow to be eligible?
Interest is allowable if the loan is taken from any financial institution or any approved charitable institution. Interest on loan taken from relatives or friends will not be eligible for deduction for this purpose. The first category covers all the banks including cooperative banks, one non banking institution HDFC Ltd. (Credila) is also approved by the government for this purpose. There is another category of institutions which includes charitable institutions and NGOs, from where loans can be taken to qualify for tax benefit on interest.
- Consequences of default
In case the loan has been taken by you for the purpose of your own education, it is very important for you to service the loan properly. Failing which the defaults has long-term ramifications for you. As you are at the beginning of your career and will need to avail many credit facilities in future like home loan, any default will spoil your credit history before it is made. This will jeopardize your chances of getting any credit in future.
So now with easy availability of education loan coupled with tax benefits you can make your dream, of making it big in life, can come true.
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)