Tuesday, September 8, 2015

Payment of Interest on Educational Loan and Tax benefits

An Individual can plan tax for spending on education of their spouse or children including legal guardian. One should not spend out of savings but should take education loan and take benefit of deduction under Section 80E for payment of interest on educational loan.
 Through this tax planning one can reduce cost of education by reducing tax liability by paying interest on education loan. The deduction for payment of interest on educational loan under Section 80E is available to an individual only if one satisfies conditions laid down under Section 80E of Income Tax Act, 1961.

Salient points to be kept in mind while planning tax deduction under Section 80E:

1. Only to Individual : Such deduction is available only to Individual and not to HUF or any other assessee.
2. Interest paid is deductible: The total amount paid as interest is eligible for deduction and there is no limit for the same. The interest paid is to be reduced from taxable income so the higher the tax slab of the assessee borrower, higher the amount of tax saving. So if there is a choice of any of the parents then higher income parent should borrow for education of their children. However there is no benefit for repayment of principal amount of the educational loan.

3. Interest on loan from Financial Institution or approved charitable Institution only: Interest on loan taken from any financial institution or any approved charitable institution for the purpose of pursuing higher education by spouse or children is eligible for deduction under Section 80E. Interest on loan taken from friends and relatives is not eligible for deduction under section 80E.
a. financial institution includes any bank or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf;
b. approved charitable institution includes any chartable institution established for the purpose of education or an institution established for charitable purposes approved by the prescribed authority under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G;

4. The Purpose of loan should be higher studies of Individual , Spouse, Children of Individual or for whom individual is legal Guardian. And Higher studies includes full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences &  vocational studies. Interest paid on education loan taken for brother or sister or other relatives is not deductible under section 80E.

5. Interest paid on education loan eligible for deduction upto 8 years; The interest paid on educational loan is deductible in computing the total income for the eight assessment years including the assessment year in which interest payment is started or until the interest is paid by the assessee in full, whichever is earlier.

6. Individual borrower can claim deduction: The deduction under section 80E for the payment of interest on educational loan is allowed to the borrower only. If loan is in the name of some other person the deduction is not allowed.

7.Loan taken for incidental expenses for pursuing higher studies is also eligible: The interest on educational loan qualifies for tax benefits even if taken for tuition fee, college fees and even for other incidental expenses including hostel charges, transport charges for pursuing such studies in India or abroad.

8. The repayment of education loan is not deductible under Section 80C.