Why you should save tax on education loans

As the academic year comes to a close, senior graders across the nation are finalising their higher education plans, whether they are looking at options to study further within the country or overseas. An important consideration here is the cost of education. For many families, education loans become a crucial tool in bridging the financial gap between the aspiration of students and the paying capacity of parents. However, a crucial aspect that often gets overlooked is the potential for tax savings associated with education loans.

The latest episode of Mint Money Shots, presented by Invesco Mutual Fund, saw Deputy Editor at Mint, Neil Borate, decode the tax benefits of study loans. “The entire interest component of an educational loan is tax deductible. There is no upper limit on this deduction,” he said. This provision offers significant financial relief to borrowers pursuing academic qualifications, both within India and overseas.

This benefit extends for a period of eight years, commencing from the year the borrower starts repaying the loan or until the interest is fully paid, whichever occurs earlier. This extended period of tax relief can significantly reduce the overall cost of education. Watch the full episode below,

Repayment Moratorium

Furthermore, financial institutions typically offer a repayment moratorium on education loans. Borate highlights that banks generally do not commence interest collection until the completion of the degree. Adding to this borrower-friendly approach, a moratorium period, often spanning one year after graduation, is usually provided before the commencement of interest accrual. This deferred repayment schedule eases the immediate financial burden on graduates as they transition into their careers.

Another significant financial advantage linked to education loans pertains to the Tax Collected at Source (TCS) rate applicable to foreign remittances for educational purposes. TCS is a tax deducted by the remitting bank during an outward transfer of funds.

The TCS Benefit

Furthermore, TCS rate is also lower for an education loan. TCS or Tax Collected at Source is a tax deducted while making a foreign remittance. “For example, if you transfer ₹20 lakh abroad to invest in US stocks, an amount of ₹4 lakh, or 20 per cent, is deducted by the bank, and only ₹16 lakh will be transferred. This amount can be adjusted against any tax payable by you, but it does affect your cash flow. The money can only come back after you file your return and get a refund,” he explained.

“However, this TCS rate falls to just 0.5 per cent if the purpose of remittance is education and the source of funds is a loan. In the example I gave, the bank will deduct just ₹10,000 rather than ₹4 lakh,” Borate further said.

This substantially lower TCS rate, thereby improving the cash flow for students and their families financing education abroad through loans.

In conclusion, education loans not only facilitate access to higher learning but also come with considerable financial benefits, including the tax deductibility of the entire interest paid over an extended period and a significantly reduced TCS rate on foreign remittances for education funded by these loans. These provisions make quality education more accessible and affordable for a wider range of students, whether they are looking for higher education in India or overseas.

Key Takeaways

• Full Interest Deduction: The entire interest paid on an education loan is tax deductible for up to eight years, with no upper limit.
• Global Applicability: This tax benefit applies to education pursued both in India and abroad.
• Deferred Interest Payment: Banks typically do not charge interest until the degree is completed, often followed by a one-year moratorium.
• Significantly Lower TCS for Education Loans: Foreign remittances for education funded by a loan attract a TCS rate of only 0.5%, compared to the standard 20% for other remittances above ₹7 lakh.

Disclaimer: Mint Money Shots is an editorial series, sponsored by Invesco Mutual Fund.