Money Guru | Principal portion of study loan taxable

Money Guru | Principal portion of study loan taxable
Comment E-mail Print Share
First Published: Mon, Jan 25 2010. 08 57 PM IST

Updated: Mon, Jan 25 2010. 08 57 PM IST
I am a 25-year-old and am working as a relationship officer in HDFC Bank Ltd. I would like to pursue higher studies abroad for which I am planning to take an education loan. Once I begin repaying my loan, would I get any tax advantage?
—Sandeep Kaur
Yes, you can claim tax benefits for the education loan under section 80E of the Income Tax Act when you start repaying your loan. You will be eligible for this tax benefit only if the loan is taken in your name or in the name of your spouse or kids. Also, loans taken from financial institutions only qualify for these tax deductions and not loans from the family or employer. The course for which the loan is taken needs to be a full-time course for any graduate or post graduate studies.
The good news is that entire amount paid as interest will be deductible from your income with no upper limit. For this you need to ensure that the loan is repaid from your taxable income and not from other sources such as savings or borrowed funds.
However, please note that there are no tax benefits for the principal repaid. Also, remember the benefits for the study loan are separate and are in addition to whatever tax benefits that may come to you from section 80C and other tax deductions.
Another aspect to remember is that you will be eligible for tax benefits only for up to eight years from the year your loan repayment starts. In case your loan repayment tenure exceeds eight years, you will not be eligible for this deduction from the ninth year onwards. Wishing you the very best for your higher studies.
I need to invest Rs50,000 in order to save my taxes. But I don’t have any savings as of now. I was planning to buy an insurance policy using my credit card. I can repay Rs50,000 through equated monthly instalments. Is that a good idea? Please suggest.
—Videsh Shankar
Videsh, this could lead to a more complex issue of mounting interest rates and you could end up losing more money through interest outgo compared with the actual tax savings. Do your homework thoroughly before you attempt such a move. Credit card interest rates are the most expensive, this holds true for procuring a loan based on your credit card as well.
Calculate how much money you will need to shell out before you completely repay the loan of Rs50,000. You could try the same exercise in the case of a personal loan too.
It is most likely that the tax outgo will be far lesser than the interest outgo and work out a lot less expensive when you calculate the total loan cost in both these scenarios. Hence, the best option is to pay off the taxes this year. You can then devise a savings plan to invest money for tax saving purposes for the next year!
Adhil Shety is CEO & founder, BankBazaar.com
Comment E-mail Print Share
First Published: Mon, Jan 25 2010. 08 57 PM IST