Cost of higher education has been rising very fast. Sometimes, the jump in fees can be really sharp. When I went for my higher education, the fee was Rs 8.5 lacs for two years. The year before, it was only ~Rs 5 lacs. A couple of years after I left college, the fee shot upwards of Rs 12 lacs. This sharp jump in fee can’t be explained through any general inflation. This is more about demand and supply at play. How do you prepare for such shocks? Beyond a point, it is not possible.
The good part is that you can bridge the deficit through an education loan. The chances of your getting an education loan will depend on multiple factors including but not limited to the academic background of the student, type of course and college/university, placement record of the college, work-experience and credit history of the applicant, collateral etc.
At Tier-I colleges, you will even have bank branches on the campus and you can easily walk in to get a loan. Well, this post is not about how easy or difficult it is to get an education loan.
Every loan has a cost involved in terms of interest. An education loan is no different. The difference is in the tax treatment of interest paid towards an education loan.
In this post, I will focus on the tax benefits you can avail if you have taken an education loan.
What are the tax benefits for repayment of Education loan?
- The interest paid towards an education loan is eligible for deduction under Section 80E of the Income Tax Act.
- There is no cap on the amount of deduction that can be availed for interest paid towards an education loan.
- The tax benefit is only for the interest payment. There is no tax benefit for principal repayment.
Beneficial tax treatment can bring down cost of an education loan.
If you fall in 30% tax bracket and the interest rate for education loan is 10% p.a., the effective cost of the loan becomes 6.91% p.a.
If you are in 20% tax bracket, the effective cost becomes 7.94%. If you are in 10% tax bracket, the effective cost becomes 8.97% p.a.
How long can I take tax benefit for education loan?
You get tax benefit for 8 years including the year in which you start the interest payment. Therefore, if you start education loan repayment in FY2018, you can get the tax benefit till FY2025.
Do note the period is counted from the time you start repaying the loan (and not from the year you took the loan). Given the nature of loan, education loans typically have a moratorium period i.e. you do not need to pay either interest or principal for a few years. However, this does not mean that interest is not charged for the period. It is just that interest for the period keeps getting added to the principal.
The rationale behind moratorium is that it may not be possible for a student to repay the loan while she is studying. Only once she finishes the education and joins work, can she repay the loan.
As I understand, there is no provision to carry forward this tax benefit. If your income is not enough to absorb the interest paid, you cannot carry forward the benefit to next year.
Are all the education loans eligible?
No, there are a few conditions to be met.
- You must have taken the loan from a financial institution or an approved charitable institution.
- Loan from a relative or a friend is not eligible for tax benefit.
- You must have taken the loan for purpose of own higher education or for higher education of your spouse and kids. Such loans taken for education of persons for whom you act as legal guardian are also eligible for tax benefit.
- Loan for education of anyone else (including your siblings) is not eligible for tax benefit under Section 80E.
- Higher education is defined under Section 80E. Higher education is any course of study pursued after Senior Secondary Examination (Class X).
- Even loans taken for education abroad are eligible for tax benefits under Section 80E. There is no restriction that the education has to be in India.
- As I understand, even loans taken for vocational courses are eligible.
I took an education loan for my daughter’s education. Can she get tax benefit?
No, the tax benefit for interest payment is available only to the borrower. Hence, if you took a loan for your daughter’s education, only you will get the tax benefit (and not your daughter).
Had the education loan been taken by your daughter, she would have got the tax benefit.
Similarly, you will not get tax benefit for loan taken under your daughter’s name even though you are repaying it.
Disclaimer
I am not a tax expert. You are advised not to base your decision on basis of contents of this post. You are advised to consult a Chartered Accountant for any taxation advice.