These days, it is not uncommon to hear about youngsters taking a loan for higher education in India. An MBA in a premier institute in India can easily set you back by ₹20 lakh or so. Funding it through a loan seems like a wise thing to do as students can repay the loan once they are employed. The Income Tax Act also allows certain tax breaks on an education loan. Parents may also be eligible to claim school fees in their tax returns. Let’s understand all the tax benefits related to education expenses in more detail.
The Income Tax Act allows tax benefits for a loan taken for higher education when certain conditions are met. Tax benefits have been laid down under Section 80E of the Income Tax Act. Taxpayer is allowed to claim total interest paid in the financial year. However, there is no tax benefit for the repayment of principal.
For deduction on interest on an education loan under Section 80E, there is no monetary ceiling. The only restriction is that the deduction can be claimed for a maximum of eight years and is only allowed for interest paid on education loan.
Eligible higher education includes all fields of study pursued after passing the senior secondary examination or its equivalent exam. It includes both vocational as well as regular courses. Also, this education loan may be taken for higher studies in India or outside India. Tax benefits are available for loans taken from any bank or financial institution or any approved charitable institutions. Remember that loans from family or friends do not qualify for this tax benefit. So if you plan to take a loan from your parents or friends, you cannot claim any tax benefits on it, besides if you are paying any interest it may get added to the lender’s income and they may have to pay tax on it.
Some other things to remember are that this tax benefit is only allowed to an individual. A HUF (Hindu Undivided Family) may take a loan for education of a member, but no tax deduction will be allowed to it under section 80E. An individual may take the loan for education of self, spouse or children or for a student for whom the individual is a legal guardian.
Parents are also allowed to claim school fees under Section 80C of the Income Tax Act. Section 80C allows a maximum deduction of ₹1.5 lakh and includes a host of eligible investments such as ELSS, PPF, NSC, 5 year fixed deposits, etc. A parent can claim a deduction on the amount paid as tuition fees to a university, college, school or any other educational institution. The deduction is allowed to the parent who makes the payment.
Let’s say the father is claiming deduction under section 80C for investment in PPF of ₹1.5 lakh. The father has also paid school fees, but the mother wants to claim school fees in her tax return under section 80C. This is not allowed. If the mother pays the school fees herself only then she can claim it under section Section 80C in her income tax return. Fees paid as development fees or transport fees are not eligible for deduction under Section 80C. This deduction is available only to an individual parent or guardian. The deduction is available for a maximum of two children for each individual. Therefore, a maximum of four children’s deduction can be claimed, i.e. two by each parent. Each parent can claim a deduction of up to ₹1.5 lakh separately every financial year. However, as discussed, such a parent must have actually paid the fees. The institution, college or university for which a deduction is being claimed must be situated in India. An adopted child’s fees is also allowed to be claimed.
Archit Gupta is founder and chief executive officer, ClearTax.