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Section 80E: Tax Exemption on Interest paid for Education Loan
With the growth in the economy, the spending on education has also increased. The education sector is evolving daily, increasing the burden on the wallet of middle-class households in the country. Education loans do not only help you in higher studies in India or overseas; it also helps you save a lot of taxes. Section 80E provides a tax deduction on the “interest component” paid on a loan taken for higher education by an individual assessee or on behalf of their spouse or children.
What is section 80E of Income Tax?
Section 80E is the income tax deduction from taxable income, which covers the deduction on the “interest component” paid on higher education loans from the notified financial or approved charitable institutions or banks. Interest paid on education loans taken for higher studies of self, spouse, or children (including for whom you are the legal guardian) can be claimed as a deduction from the taxable income.
Who can claim tax benefits on interest paid on an education loan?
The individual can claim this deduction on interest payment on an education loan taken for self, spouse, children, and a person for whom the assessee is a legal guardian. The person repaying the loan for the above-mentioned people can benefit from the 80E deduction.
If your parents are sharing the EMI payments, then the extent to which they pay interest part of the EMI can be claimed by them and the rest by you.
Please note that deduction u/s 80E can be claimed by individuals only. Hindu Undivided Families (HUF) and companies are not eligible to avail deduction under this section of Income Tax Act.
What is the deduction amount u/s 80E?
There is no maximum or minimum deduction limit specified under section 80E. The deduction amount on interest payment is not impacted by the interest rate charged by the financial or charitable institution, the amount of the loan, or any other factor. This section dedicates the actual interest paid on education loans during the financial year.
Where should the loan be availed?
If you want to claim the benefit of 80E, then the loan must be taken from notified:
- Recognised Financial institutions or
- Approved Charitable institutions.
Which are the notified financial institutions under section 80E?
Section 80E states that the interest paid towards an education loan should be taken from an approved charitable institution or a recognized financial institution. Any other entity from which the loan is taken is not eligible for the deduction. These institutions can be identified as follows:
- Financial institution - According to the Banking Regulation Act, 1949, a financial institution is defined as any bank working according to the regulations defined in the Banking Regulation Act.
- Charitable institution - A charitable institution can be defined as an organization with authority mentioned in clause 23C of Section 10.
Is any documentary proof required to claim a deduction under section 80E?
The deduction under section 80E can be claimed when filing your income tax return, and no documentary proofs are required to be attached. The documents mentioned below should still be kept safely in case required to be submitted to the income tax department in case of any future scrutiny.
- The sanction documents of the loan.
- The repayment statements from the financial institution or charitable institution. Such statements should clearly bifurcate the principal and interest amount repaid.
What is the period/time limit for claiming a deduction?
The deduction under section 80E can be claimed for a maximum of 8 assessment years from the year you start repaying the loan or until the interest is fully repaid, whichever is earlier.
In the case where the complete repayment of the loan is done in 5 years only, then tax deduction will be allowed for 5 years and not 8 years.
- You have taken an education loan in FY 2022-23 and started paying interest in the same year.
- In this case, you can claim a deduction u/s 80E for AY 2023-24 to AY 2029-30 (i.e., 8 assessment years).
- Consider a different situation where you have repaid the complete loan in 5 years only.
- In this case, you can claim a deduction u/s 80E from AY 2023-24 to AY 2027-28(i.e., till completion of the loan)
How to calculate the deductions for section 80E?
You can calculate the tax benefits under section 80E as under For example,
|Less: Interest paid (Deduction u/s 80E)||Rs 1,00,000|
|Net Taxable Income||Rs 5,00,000|
The interest paid (Rs 1,00,000) on education loan is deducted from the taxable income (Rs 6,00,000). As a result of which the net taxable income is reduced to Rs 5,00,000.
Frequently Asked Questions
Q- Can deduction u/s 80E be availed if the loan is taken for higher studies at a foreign university?
Yes, the deduction can be availed for foreign education loans also. The assessee should be an Indian citizen and the loan should have been taken from an recognised Indian financial institution or approved charitable institution. Thus if these conditions are satisfied then it does not matter that the course and college or university is from outside India.
Q- Is deduction u/s 80E available if the loan is from a foreign institution?
No, for claiming the deduction under section 80E, the loan must be taken from an Indian Financial institution or specified Indian charitable institution or Indian Bank.
Q- I work in a company and took an employee’s education loan for sending my son to the USA for further studies. The terms and conditions are exactly like that of a bank. Can I claim my interest amount under 80E?
No, you cannot claim deduction in this case. The loan has to be from a recognized Indian financial or an approved charitable institution. A loan taken from an employer, friend or relative is not allowed for deduction. Though the terms are the same, you took a loan from your employer so you are not qualified to claim income tax deduction under section 80E.
Q- What is the meaning of higher education for section 80E?
As mentioned above, the tax deduction under section 80E is available for the interest paid on education loans taken for higher studies. Now, these higher studies, as defined by the Act, are as follows: All the courses taken after successfully completing class 12th.
- A legible authority like the local authority, State government, or Central government should approve the board or the university where admission is taken.
- The loan taken should be for the study of full-time courses only. The field could be medicine, engineering, nursing, applied science, management, etc. Part-time courses are not entitled to deduction under 80E. But it does cover the vocational courses taken after completing the 12th standard.
- The course for which the loan is taken can be in a college or a university outside India. The loan has to be taken by an Indian resident and the financial or charitable institution from which the loan is taken also has to be Indian.
Q- For what purpose should a loan be taken to claim deduction u/s 80E?
Interest on loans taken for pursuing higher education (including vocational studies) is eligible for deduction u/s 80E.