Section 80 E - Interest Deduction on Education Loan
Section 80E - Interest Deduction on Education Loan
In today's society, the value of education cannot be understated. Education costs are growing, so are the costs of higher studies. In emerging economies, such as India, where the proportion of the young workforce is higher. Education plays a crucial role in the further development of the economy and individual lives.
An education loan can not only help you with your finances, but it can also help you save money on taxes. According to section 80 E of the income tax act 1961, interest on payment of education loan can be claimed as deduction. In this article, we will go through Section 80E in-depth, which can help you in tax savings.
Who can claim deduction under section 80E
The tax benefit can only be claimed by an individual; it cannot be claimed by a HUF or any other kind of taxpayer.
Parents who have taken a loan for their child’s higher studies can easily claim deduction under section 80E.
You can claim deduction under section 80E if you have taken a loan for yourself, spouse or children or if you are the legal guardian of a student.
The purpose of the loan
The loan should be used to fund higher education. It makes no difference whether you study in India or overseas. Loans for foreign education are also covered.
In this context higher education is considered courses after the senior secondary board or equivalent exams. It covers both vocational as well as regular courses.
Which banks or financial institutions are covered
Loans have been taken from any bank or financial institution operating as per the banking regulation act 1949 or any approved charitable institutions. Loans taken from any friend or relative are not eligible for the deduction.
Claiming 80E deduction amount
The amount of deduction is the loan's interest portion. There is no upper limit on the deduction allowed. The principal, on the other hand, is not allowed as a deduction.
Even if an individual avails a maximum deduction under section 80C which is for tuition fees, he or she can still claim the deduction under section 80E.
The deduction period starts from the year when you start repaying the loan.
You can use this deduction for only 8 years, which means the deduction will start from the year you start repaying the loan up to 8 years.
And if you fully repay the loan in 6 years, then the deduction will be available for only 6 years.
However, if your repayment of the loan exceeds 8 years then the deduction will be restricted to 8 years only.
Income tax savings
Deduction under section 80E can lead to a good amount of tax savings as there is no upper limit to the deduction.
As it is explained only the interest part of the loan is eligible for deduction. Suppose your income tax amount post all deduction is Rs. 6,50,000 and you have paid an interest of Rs. 1,50,000 in the financial year. Then, under Section 80 E, you will be given a deduction of Rs. 1,50,000, making your taxable amount Rs. 5,00,000.
Prepay an education loan?
When you begin repaying the loan and receive a tax deduction, you are faced with a dilemma: should you prepay the loan and receive tax benefits, or should you invest the amount?
If you can earn more money by investing than the interest rate charged, you can go for investing the amount or you can prepay the loan and be debt-free as soon as possible with the benefit of a deduction and establish a good repayment track record.
Prepayment of a loan or investment can be a difficult decision when considering which choice is best for your portfolio and earnings. We at equiseed wealth can help with a plan that maximizes your investment returns and help you with this dilemma.
Your Financial Wingman will help you to file taxes in three simple steps.