As the cost of higher learning has risen, demand for education loans has gone up. According to a study by Crif High Mark, one of the four credit bureaus in India, the average ticket size of education loans has gone up from Rs2.5 lakh in 2010-11 to Rs6.77 lakh in 2016-17, an average year-on-year growth of over 16%. While taking an education loan, or any loan for that matter, getting the lowest possible rate of interest is a biggest concern. However, low rates are only one of the ways of minimising the impact of an education loan. These loans also get deductions under section 80E of the Income-tax Act. However, did you know that not all education loans qualify for this deduction? Read on for details.
Your eligibility for Section 80E benefits
Borrowers of education loans can claim deduction on the interest paid, though not the principal amount. Moreover, unlike in home loan deductions, there is no limit to the amount that can be claimed as deduction, and it can be claimed for a period of 8 years only, or till the entire loan is repaid, whichever is earlier.
The borrower can avail tax benefits under this section for an education loan to support higher studies of self, spouse, children or a student of whom she is the legal guardian. So, education loans taken for siblings or other relatives don’t qualify for 80E benefits.
These benefits can turn into sizeable savings over the period of the loan. Take for instance a Rs20 lakh education loan, taken at an interest rate of 11.5%, assuming a 2-year period of study and moratorium and then repayment spread over 5 years. Broadly, the interest payment each year would be Rs2.3 lakh. If the borrower is in the highest tax slab of 31.2% (effective rate after Budget 2018), she can save Rs71,760 in taxes each year. To claim this benefit, you need to get an interest payment certificate from your bank or the lending institution.
Lenders’ eligibility for 80E benefits
For most students, banks are the first choice for an education loan, mostly because their interest rates are lower than that of a non-banking financial company (NBFC).
However, according to the Crif Highmark report, non-performing assets in education loan segment are rising; so the banks are now more careful in giving out these loans. At the same time, many NBFCs are trying to get a share of this market. A student who may find it difficult to get the loan from a bank, could get it with relative ease from an NBFC, though at a higher rate of interest.
But here is the catch. Section 80E of the Income-tax Act specifies that it is applicable only to specified financial institutions, including banks and “any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf.” This means that while education loans from all banks can provide you this benefit, loans from NBFCs may or may not.
The best way to know whether an education loan from an NBFC will let you avail 80E benefits, is to ask for a copy of the income-tax department’s notification specifying that the particular NBFC is eligible. You can cross-verify this notification from the Gazette of India, which can be viewed online on egazette.nic.in, or by going to https://www.incometaxindia.gov.in/pages/communications/index.aspx.
Remember that loans from NBFCs are relatively more expensive than those from banks. Without the 80E benefits, a loan from a non-specified NBFC would end up costing you much more.