So, your daughter has just secured admission into a reputed university in the US and your next challenge is how you are going to finance this massive expenditure. There are recognized banks and financial institutions or even charitable institutions that give loans to help students pursue studies abroad. What is more, the servicing of the loan (interest paid on the education loan) also offers you tax exemption under Section 80E of the Income Tax Act. The education loan tax exemption is a major attraction of taking loans to finance your higher education. You can understand how to get tax exemption for education loan with the help of this very simple Education Loan tax exemption calculator. Check out this calculator below..
Source: HDFC Credila
In the above illustration, look at the specific case of a person who has taken an education loan to fund his daughter’s education to the tune of Rs.25 lakhs. Assuming that he is in the 30% income tax bracket, the entire interest component of Rs.300,000 per annum will be tax-exempt for him under Section 80E of the Income Tax Act. Remember, there is no upper limit for the exemption that you can claim for interest paid on education loan. In the above case, since you are in the 30% tax bracket, the tax exemption on the interest paid will be to the tune of Rs.92,700 (including surcharge and cess). Therefore, this reduces your effective interest cost in post-tax terms from 12% to 8.29%. Having understood the education loan tax exemption calculator, let us move on to the nuances of an education loan and the tax benefits as well as the concomitant conditions thereon..
What exactly does an education loan fund?
Contrary to popular belief, education loans are available to fund higher studies within India and also to fund studies abroad. Education loans can be sought to fund normal higher education or even to fund specific vocational studies. Most banks and financial institutions will fund up to 100% of the total cost of the education and there is no margin or collaterals required in this case. To avail the tax benefits, you need to avail these education loans from specific banks, financial institutions or certain specified charitable trusts. Remember, education loans taken from your friends and relatives do not qualify for education loan deduction under Section 80E of the Income Tax Act.
Who is eligible to claim this deduction on education loan..
An education loan can either be taken for your own studies or on behalf of your spouse or your children. Education loans cannot be taken on behalf of your cousins or friends. Only individuals are eligible to claim deduction for educational loans taken. This facility is not available to Hindu Undivided Families (HUFs) or other incorporated bodies. As a parent you can claim this deduction under Section 80E on behalf of your son or your daughter.
Amount of deduction and process involved for claiming deduction..
When the education loan is taken there will be an EMI that is to be paid each month. This EMI will have a principal component and an interest component. To be eligible for the education loan tax exemption under Section 80E, you must get a certificate from your bank that clearly lays out the demarcation of the EMI between interest component and the principal component. The principal component is not eligible for deduction under Section 80E of the Income Tax Act. It is only the interest component that is eligible. The good news is that there is no upper limit and the entire interest paid by you towards the education loan is available as deduction under Section 80E.
How long will the deduction be available under Section 80E of the IT Act?
Education loan tax exemption will only be available for a maximum period of 8 years or the tenure of the loan repayment whichever is lower. Banks and financial institutions are willing to structure your education loan in such a way that in the initial 2 years you only pay the interest component. This ensures a much higher yield on your education loan in the first 2 years. But the outer limit of the entire loan cannot be more than 8 years. If the loan exceeds 8 years then you cannot claim tax deductions under Section 80E beyond that point. That is an important factor to remember when you understand how to get tax exemption for education loans.
The beauty of education loans is that it not only instils a sense of responsibility in the student but also works out to be extremely tax efficient for you. Most banks will also offer more attractive rates for education loans, despite being unsecured. You can also structure the loan in such a way that you get the loan sanctioned well in advance and show that as net worth proof when you approach foreign universities. The time to start is now!