What is section 80E of income tax?
Section 80E is the income tax deduction which covers the deduction on the “interest component” paid on higher education loan from notified financial or charitable institution. Interest paid on education loan taken for higher studies of self, spouse, or children (including for whom you are legal guardian) can be claimed as a deduction from the taxable income.
Who can claim tax benefit on interest paid on education loan?
This deduction on repayment of education loan can be claimed by the individual for self, spouse, children, and a person for whom he is a legal guardian. The person who is repaying the loan for the above mentioned people can take benefit of 80E deduction.
If your parents are sharing the EMI payments, then the extent to which parents are paying interest part of EMI can be claimed by them and rest by you.
What is the deduction amount u/s 80E?
There is no maximum or minimum deduction limit specified under section 80E. The amount of deduction on interest payment deduction is not impacted by the rate of interest charged by the financial or the charitable institution, amount of loan or any other factor. This section provides a deduction on the actual interest amount paid during the financial year.
To avail benefit u/s 80E, from where the loan should be availed?
If you want to claim benefit of 80E, then loan must be taken from notified :
- Financial institution, or
- Charitable institution.
Which are notified financial institutions under section 80E?
Section 80E states that the interest paid towards an education loan should be taken from a recognized charitable institution or a financial institution. Any other entity from which 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 that has the authority as mentioned in clause 23C of Section 10.
What is the documentary proofs required to claim deduction under section 80E?
The deduction under section 80E is claimed at the time of furnishing your income tax return and no documentary proofs are required to be attached to it. The documents as 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 have a clear bifurcation of principal and interest amount repaid.
What is the period/time limit for claiming deduction?
The deduction under section 80E can be claimed for a maximum of 8 Assessment Years. But in case you foreclose the loan account sooner, the income tax deduction will be available for such reduced time period in which the loan was active.
- You have taken an education loan in AY 2019-20 and start paying interest in the same year.
In this case, you can claim a deduction u/s 80E for AY 2019-20 to AY 2026-27 (i.e. 8 assessment years).
- Now consider a different situation in which you have repaid the complete loan in 5 years only.
In this case, you can claim a deduction u/s 80E for AY 2019-20 to AY 2023-24 (i.e. till completion of loan)
How to calculate the deductions for section 80E?
You can calculate the tax benefits under section 80E as under For example,
|Less: Interest repaid (Deduction u/s 80E)
|Net Taxable Income
The interest repaid (Rs 1,00,000) on education loan is subtracted from the taxable income (Rs 6,00,000). As a result of which the taxable income and the tax payable 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. The assessee should be an Indian citizen and the loan should have been taken from an Indian financial or charitable institution. But, the course, college or university can be from outside India.
Q- Is deduction u/s 80E available if the loan is from a foreign university?
No, for claiming the income tax benefit under section 80E the loan must be taken from an Indian Financial institution or specified Indian charitable institution.
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 this deduction. The loan has to be from a recognized Indian financial or a 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 for claiming 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 amount paid on education loan taken for higher studies. Now, these higher studies, as defined by the Act are as follows:
- All the courses that are taken after the successful completion of class 12th.
- The board or the university where admission is taken should be approved by a legible authority like the local authority, State government or the Central government.
- The loan taken should be for the study of full-time courses only. The field could be any like medicine, engineering, nursing, applied science, management and so on. Part-time courses are not entitled for 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 of 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 loan should be taken for 80E?
Only loans taken for pursuing higher education (including vocational studies) are eligible for deduction u/s 80E.