All You Need to Know About Tax Deductions Under Section 80E
Under Section 80E, a taxpayer (assessee), who has taken an education loan to finance higher education at a foreign university abroad for self, spouse, children including adopted children or for a student of whom they are a legal guardian, can claim deductions on the interest paid towards the loan.
Table of Content
- Section 80E
- Tax benefits under Section 80E
- Eligibility criteria for tax deductions under Section 80E
- Who can claim Section 80E deductions?
- For how many years can one claim 80E deductions?
- How much tax can you save?
- Should you repay the loan early?
- How are deductions under Section 80E different from those under Section 80C?
- Frequently Asked Questions
The cost of getting a higher education in India is increasing by the day. And if we were to go abroad to seek higher education at a foreign university, we have to empty most of our savings in this pursuit. If we don’t have that kind of bank balance, we fall back on education loans to fulfil our dreams of higher education at a foreign university. This loan has to be repaid, and the interest added to the principal causes the monthly EMIs to go higher — making an already difficult student life all the more challenging. So, in this case, what should you do?
Those who have taken an educational loan to seek higher education at a foreign university abroad can seek tax deductions under Section 80E of the Income Tax Act, 1961.
The Section 80E of the Income Tax Act, 1961 states that if a taxpayer, also known as the assessee, has taken an education loan to finance their higher education at a foreign university abroad for self, spouse, children including adopted children or for a student of whom they are a legal guardian, can claim deductions in taxation on the interest paid towards the loan.
An education loan, taken for higher studies abroad, not just includes the tuition fees of the proposed courses, but it also includes the travel expense, lodging expenses at the institution and expenses towards study materials and other instruments, such as a laptop, that may be compulsory for the course.
Section 80E identifies the education loan as a whole and provides 80 E deductions on the interest paid towards the principal.
Tax benefits under Section 80E
- The individual or the assessee can claim tax benefits on the interest amount paid towards the principal loan amount under Section 80E of Income Tax Act. So, only the interest amount from the monthly EMI can be claimed for Section 80E deductions.
- Even if the taxpayer has availed for tax deductions towards the maximum limit of ₹1,50,000 under Section 80C, they can still claim deduction under Section 80E.
Note: Section 80C allows tax deductions on the tuition fee payment for higher education abroad. On the other hand, Sec 80E of Income Tax Act allows for tax deductions only on the payment of interest towards the education loan for higher education abroad.
Eligibility criteria for tax deductions under Section 80E
- Deductions under Section 80E are applicable for payment of interest of an education taken specifically for higher studies. Higher studies are referred to as education that is pursued after completion of the 12th standard or senior/higher secondary examination. It also includes vocational and postgraduate courses.
- Only an individual taxpayer is eligible to claim for tax deductions under Section 80E. HUF or Hindu Undivided Families and firms or companies are not eligible to claim for deductions under 80E.
- A loan from banks or financial institutions registered under the Banking Regulation Act 1949 qualifies for Sec 80E deductions.
- A loan from approved charitable institutions under Clause 23C of Section 10 also qualifies for Sec 80E deductions.
- A loan from friends or relatives does not qualify for deduction under 80E.
- The deduction is applicable only on the loan to fund high education abroad.
- The tax benefit is available for a maximum period of eight years. The tax deduction is not allowed beyond eight years.
- The education loan should be in the name of the assessee for the taxpayer to claim deductions under this section.
- Section 80E deductions are only applicable to the interest component of the education loan.
Note: The Section 80E deductions do not apply to the principal component of the education loan.
Who can claim Section 80E deductions?
The individual taxpayer or assessee can claim tax deductions on education loan taken for:
- Children (including adopted children)
- A student for whom the taxpayer or the assessee is a legal guardian
There is no maximum limit on the tax benefit amount under Section 80E. However, the benefits can only be availed on the payment of interest towards the principal amount. 80E deductions can be availed from the year the assessee starts paying the interest.
For how many years can one claim 80E deductions?
Banks usually provide a one year moratorium period to the borrower from the date of completion of the course to begin the repayment process. Therefore, one can begin to claim deductions from the time they start to pay the interest amount of the loan.
Important points to note are:
- The tax benefit is applicable for eight years or until the interest is paid in full, whichever is the earliest.
- If the repayment exceeds the eight years, then they will no longer be eligible for Section 80E deductions.
If the loan is repaid, for instance, within five years, then the assessee can claim for deductions only for those five years. Once the amount is repaid in full, they cannot claim for any further deductions even though the eight years are still let to complete.
How much tax can you save?
- There is no maximum upper limit on the tax benefit amount under 80E.
- However, tax deductions under Section 80E of the Income Tax Act, 1961 can only be claimed on the payment of interest towards the principal amount of the education loan.
For example, if your total taxable income is ₹7 lakhs and you are repaying an interest portion of ₹3 lakhs per annum, then your total taxable income would be ₹4 lakhs.
Should you repay the loan early?
This depends from individual to individual. Some taxpayers use the entire quota of eight years to avail the tax benefit and to invest their surplus capital in other investment instruments and gain profits during that period.
Others, however, plan to repay the amount at the earliest and become debt-free. You can choose the approach which suits you the best. Either way, you will be able to avail tax benefits until you repay the amount in full.
However, beyond eight years, these benefits are not applicable.
How are deductions under Section 80E different from those under Section 80C?
- Under Section 80C, tax deductions can be claimed on tuition fees paid towards school, college or university education. The maximum annual deduction limit is ₹1.5 lakhs.
- Under Section 80E, tax deductions could be claimed only on the payment of interest towards the education loan for higher education.
- Both the sections are exclusive of the other.
Can you claim 80E deductions with different sections?
The taxpayer is eligible for tax benefit under Section 80E over and above the other tax benefits under relevant sections under Chapter VI A of the Income Tax Act.
Therefore, even after availing the maximum ₹1.5 lakhs tax benefit under Section 80C, the taxpayer can further claim tax benefits under Section 80E.
Frequently Asked Questions
- Who can avail tax benefit under Section 80E?
The individual taxpayer who has taken an education loan to finance the higher education for self, spouse, their children, including adopted children, and students for whom they are legal guardians, can avail tax benefits under Section 80E.
- Who cannot avail tax benefits under Section 80E?
HUF (Hindu undivided Families) and companies do not qualify for tax benefits under Section 80E. Also, a loan taken from relatives or friends does not qualify for tax deductions under 80E.
- How much amount can you avail for deductions under Section 80E?
There is no maximum limit on the amount that could be claimed for tax benefits under Section 80E. The deduction is applicable only on the interest portion of the loan. Therefore, one can claim deductions regardless of the interest amount.
- What happens if the loan repayment exceeds the eight years?
You will be able to repay the loan even after the eight years. However, you will no longer be eligible to avail the tax benefits under Section 80E.
- From where should I take the education loan to qualify for Section 80E deductions?
The education loan should be taken from banks or financial institutions registered under the Banking Regulations Act 1949, or from charitable trusts approved under Clause 23C of Section 10. A loan from relatives, friends and unauthorised sources do not qualify for 80E deductions.
Section 80E is a wonderful option to save some extra money from the tax ambit. Every individual taxpayer who is paying for the education loan should take advantage of this tax-saving benefit.
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