Education is a type of investment that offers long-term advantages, but the increasing costs of education in our nation are concerning. However, the Income Tax Department offers various tax deduction benefits to reduce the burden of education loans.
If you've taken out an education loan, you can claim tax deductions under Sections 80E and 80C of the IT Act. However, you would only be entitled to deductions if you have followed the previous tax system. The new tax regime has increased the taxable income slabs while eliminating the majority of the deductions and exemptions available under the prior tax regime. Let's discuss tax benefits under Section 80E in detail through this article.
What is section 80E of the Income Tax Act?
Section 80E provides a tax deduction from taxable income, including the "interest component" of higher education loans from financial institutions like NBFCs, banks or charitable organisations. Interest paid on education loans obtained for higher studies is deducted from your taxable income.
Who can claim Tax Benefits on Interest Paid on an Education Loan?
This deduction is available for interest payments on education loans for the individual, spouse, children, and a person whose assessee serves as legal guardian. The person repaying the loan for these individuals may benefit from the 80E deduction.
The deduction is only available for eight years if the loan is obtained in the taxpayer's name. Only loans made by recognised banks and financial institutions are eligible for deduction. Furthermore, loans from friends and family cannot be utilised to claim deductions.
If your parents share the EMI payments, they can claim the interest they paid, and you can claim the remaining.
Eligibility Criteria
These are the eligibility criteria for claiming deductions for education loans under the 80E tax act:
Only the interest portion of an educational loan can be claimed as a deduction.
Individuals can only claim a deduction for educational loans. Hindu undivided families and businesses cannot get the 80E deduction.
The 80E deduction is only available if the education loan is obtained from a recognised financial institution or charity organisation rather than from friends or family.
Loans must be obtained for higher education. It can be taken by the taxpayer, their spouse, or children.
The deduction can be claimed for a maximum of eight years.
It would only be available to individuals who have chosen the former tax scheme.
From whom can the loan be availed?
Section 80E requires that the interest on an education loan be paid from an approved charity institution or a recognised financial institution. If the money is borrowed from any other organisation, it is ineligible for deduction. These institutions are identified as follows:
According to the Banking Regulation Act of 1949, a financial institution is any bank that operates per the requirements outlined in the Act. A charity institution is defined as an organisation with the power provided in Clause 23C of Section 10.
Charitable institutions include any university or educational institution that was formed purely for educational purposes and is a non-profit organisation. Trusts or organisations created for charitable or religious purposes are also included. The mandated authority is the Commissioner of Income Tax (Exemptions) or Director General for such cases.
Are there any Documents Required?
You can claim the deduction under section 80E without attaching any documentation when filing your income tax return. The documents listed below should be kept for your reference in case they need to be presented to the income tax authorities for future review.
Loan sanction documents.
Repayment statements from a financial institution or charity organisation. These documents should separate the principal and interest amounts repaid.
You must also get an Interest certificate for each fiscal year from a bank or financial institution that has approved the loan.
The Exemption Limit Under Section 80E
As previously stated, the requirements under Section 80E of the Income Tax Act of 1961 allow persons to deduct just the interest component of a loan obtained for higher education. As a result, taxpayers cannot claim any tax breaks on the loan's principal amount.
However, these deductions are only available during the years when interest is paid on the loan amount. Furthermore, there is no maximum deduction amount.
Period of deduction under section 80E
These deductions for the interest component begin in the year in which the taxpayer begins repaying the loan. However, once an individual begins repayment, he or she can claim deductions under Section 80 for 8 years or until the interest amount is entirely returned (whichever comes first).
As a result, if a taxpayer repays the whole loan amount within five years, tax deductions are only available for those five years. Now that you've learned everything there is to know about section 80E and the rules for claiming a deduction under it, you may file your ITR and enjoy these benefits. If you wish to avail an education loan, you can calculate the EMI using the education loan EMI calculator to allocate the funds appropriately.
Tax benefits
An individual who has obtained a loan for higher education may be eligible for a variety of tax benefits under the Income Tax Act. Assume a taxpayer has already claimed the maximum deductions allowed under Section 80C (Rs. 1,50,000). They will still be qualified for the 80E deduction because there is no maximum cap on deductions.
Many people prefer to pay off their college loans throughout the full 8-year payback period to take advantage of the deductions.
This technique suits people who believe they can save their income by investing extra cash rather than repaying EMIs. People prefer to invest their extra money rather than use it to pay off their debt.
However, if a person repays the loan as soon as feasible, he or she will be free of the burden of EMIs and avoid sliding into a debt trap.
Conclusion
Section 80E of the Income Tax Act allows people to claim tax breaks when repaying their college loans. However, one must determine whether to extend the repayment time or pay off the balance as soon as feasible.
