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A guide to tax benefit on education loans

A guide to tax benefit on education loans
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First Published: Fri, Mar 23 2012. 01 15 AM IST

Updated: Fri, Mar 23 2012. 12 11 PM IST
An education loan not only helps you afford higher education, but also gives you an income-tax benefit. Join two co-workers, Anu and Sunitha (two fictional characters created by Mint Money), as they discuss various aspects of the tax benefit you can get on an education loan under section 80E of the Income-tax Act.
Anu: I am planning to help my daughter by taking an education loan for her masters in a business degree course. Her results haven’t come in yet, but I thought of being prepared with basic research in advance.
Sunitha: That’s true and early preparation always helps. In fact, I also took an education loan for my son a couple of years ago. If you need any help let me know.
Anu: Well, I have done my research and pretty much know most of the details around it. Just the tax benefit bit is confusing me.
Sunitha: Oh, no problem. I could help. After all, I am getting a tax
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benefit on this loan I took for my son.
Anu: Really?
Sunitha: Yes, you can get an income-tax benefit for an education loan under section 80E of the Income-tax Act.
Anu: You took the loan in your name, right?
Sunitha: Yes, anyone who takes the loan can benefit as long as the loan is taken for his/her spouse, children or even herself.
Anu: And what are the benefit?
Sunitha: Whatever amount you pay as interest on the education loan is tax deductible.
Anu: The entire interest amount?
Sunitha: Yes. You get a deduction for the interest paid during the year from your income for that particular year.
Anu: There is no upper limit the way it is in a home loan.
Sunitha: No. There’s no upper limit on the interest amount in education loans.
Anu: That sounds nice.
Sunitha: But I am talking only about the interest part. Keep in mind that you don’t get any deduction or tax benefit for the principal amount you repay on the education loan.
Anu: Okay. My daughter’s course is for a year. By when will the income-tax benefit be available?
Sunitha: The year in which you start repaying the loan plus seven more years, so that’s eight years in total.
Anu: Sure. It should take that long to repay the loan. The loan amount is very high, after all it’s a premium institute.
Anu: So will my daughter for whom I am taking the loan get the tax benefit too?
Sunitha: See, if you avail the loan, you get the tax benefit. But if she takes a loan in her name, she will get a tax benefit. By the way, you can get the tax benefit even for a loan you take for any student of whom you are a legal guardian.
Anu: Oh, I see. Anyway I am not anyone’s legal guardian
Sunitha: I hope you are taking the loan from either a financial institution or an approved charitable trust. Remember, if you take a loan from a friend or a relative, it won’t qualify for a tax deduction. Also, remind me which course does your daughter plan to take?
Anu: Masters in business management.
Sunitha: That’s good. You can get a tax benefit on education loans taken for both regular as well as professional courses pursued after passing the senior secondary examination. Also, is it a full-time programme?
Anu: Yes, yes, it’s a full time course. That too from a foreign institute.
Sunitha: I was asking because education loans taken for part-time courses do not fit the section 80E deduction criteria. Only full-time courses are eligible for the tax benefit.
Also, to avail the deduction, it’s not necessary to take a loan for an admission in an Indian college. Even if the course is pursued abroad, it can qualify for the deduction.
Anu: Anything else I should know?
Sunitha: The deduction can be enjoyed by an individual and not a Hindu Undivided Family.
Anu: No issues on that front. What was the eight-year point you mentioned earlier?
Sunitha: Firstly, the tax benefit starts once you start the repayment. Deduction is allowed for the initial assessment year or the year in which you start paying the interest on the loan, plus seven years immediately after the initial assessment year. The deduction is available only up to eight years.
Anu: What if the loan tenor is more than eight years?
Sunitha: Even if the loan tenor exceeds eight years, you won’t be able to claim for a deduction beyond eight years.
Anu: So it’s better to get rid of the loan within eight years. After that there isn’t any tax benefit.
Sunitha: True. Good wishes for the admission and loan procedures.
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First Published: Fri, Mar 23 2012. 01 15 AM IST