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Education loans taken from non-banking financial companies (NBFCs) may not qualify for a tax deduction. For a borrower to avail of the tax benefit, the financial institution must be notified by the government.

“The regulations state that the loan should be taken from any bank, approved charitable institution or ‘notified’ financial institution. Borrowers can only avail the tax deduction if the loan is from NBFCs that the Central Board of Direct Taxes (CBDT) has notified," said Naveen Wadhwa, deputy general manager, Taxmann, a research and advisory firm.

The CBDT has notified only a select few NBFCs in this case.

A borrower can get the deduction under Section 80E on the interest portion of an education loan taken for higher studies. The student or a close relative (spouse, children or legal guardian) can avail of it for up to eight years.

Borrowing for higher education is among the big loans that an individual takes. Like in the case of a home loan, tax deduction can help lower an education loan burden.

“Not many are aware that the CBDT has notified only a few NBFCs. Usually, borrowers approach NBFCs for the interest certificate in March. Whether notified or not, NBFCs give borrowers a loan statement that states the principal and interest paid during the year," said Arjun Krishna, co-founder, WeMakeScholars.com, an online loan and scholarship consultant.

They submit the statement to their chartered accountants, who avail the deduction.

But this could have consequences. “There could be problems if the borrower’s returns come up for scrutiny. In such a case, the tax department would ask the borrower to submit evidence for the returns filed. If the borrower had claimed a deduction for an NBFC that is not notified, the tax officer would disallow the deduction," said Wadhwa.

In retrospect, the borrower’s taxable income will be higher than declared. Consequently, the tax officer will point out that the tax liability was higher than declared.

The borrower will need to pay the tax liability and applicable interest. There could also be a penalty under Section 270A, which deals with the concealment of income or furnishing inaccurate particulars of the income.

If you are going for a new loan, check with the lender whether it is notified by the CBDT or not. If you have an ongoing loan and are unsure about the lender’s status, you must email and check. Avoid talking on the phone with a customer care executive.

If the CBDT has not notified your lender, don’t take the deduction under Section 80E.

The other option is to shift your education loan to a bank if you have finished your course, and the regular equated monthly instalment or EMI has started.

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