The ever-increasing cost of educationis worrying parents who want their children to pursue higher education. Financing the high-pricededucation is a matter of concern for all such parents.
However, the last decade has seen Indian banking industry coming to the rescue of such parents by way of granting education loans. Like the banking sector, the income tax laws have also kept pace with the need of supporting these students and parents. In this article, I shall discuss the various aspects of tax benefits surrounding education loans.
Nature of deduction
The income tax laws allow you to claim interest paid by you in respect of an education loan against your taxable income without any upper limit. However, the deduction is available only in respect of interest and there is no provision in the present law for allowing deduction on the repayment of the principal amount. Moreover, there is no restriction as to when you can start claiming this deduction. You can start repayment of these loans during the period your child is studying or after completion of his studies.
It is important to know that there is no bar on claiming tax benefits in respect of tuition fee paid out of the education loans taken by you and interest paid on such loan. You can claim both the deductions i.e. deduction in respect of tuition fee and interest on loan taken for paying such fees simultaneously.
When and for what period?
The deduction is available on the basis of actual payment of interest. If you pay the interest for earlier years in a single year, you will get the deduction in respect of all the actual interest paid irrespective of the year to which the interest relates. If you are paying arrears of interest, collect certificates mentioning the total amount of interest paid by you during the year from your banker.
The deduction for interest payment is available for eight consecutive years. The first year term shall begin from the year in which you first start paying the interest on such education loan.
This year may or may not be necessarily the year after you have obtained the loan. In case you have decided to opt for moratorium during the education period, the eight year period shall start later.
However, if your loan tenure exceeds eight years, you cannot claim the deductions beyond the consecutive period of eight years. If you repay the loan before eight years, logically, the deduction will not be available once the loan is fully repaid. Therefore, you should plan to repay the education loan within eight years.
Which courses qualify?
Any education loan taken for pursuing any course after senior secondary examination (HSC as is popularly known) qualifies for this purpose. Earlier, this benefit was given only for the full-time courses of graduation or post graduation in specified fields like medicine, engineering, etc.
However, the budget of 2009 changed all this and now you can claim tax benefits in respect of part-time courses too. What is required is that the course should be pursued from any government-recognised school, board or university, though not necessarily under the central government. It may be recognised even by a local authority. Even a part-time course or a diploma course will qualify for the purpose of claiming this interest deduction, provided the institution imparting such course is recognised.
Deduction for tuition fee in respect of two children is available under Section 80 C if the education institution is situated in India. However, the interest deduction for education loan can be claimed even if the study is pursued outside India.
Who can claim the benefit?
The benefit is available only to an individual and not to the HUF (Hindu Undivided Family) unlike many income tax benefits which are available to individual and HUF both.
Earlier, the law provided for deduction of interest only to the person who had taken the loan for his own studies. This was amended in the budget of 2007 and since then you can claim deduction if the loan has been taken for study of yourself, your spouse, child or any other child for whom you are a guardian.
It is advisable to claim the benefit of interest for such loan in the income tax returns of the person who falls in the higher tax slab. Generally, it would be the parents of the student who normally fall in the higher tax slabs as it is highly unlikely that the person for whose education this loan is taken falls in the higher slab.
The parents can take the benefit of interest deduction in case the interest is agreed to be paid during continuance of the education. In case the person for whom the loan is taken falls in higher tax slab, he can pay the interest and claim it in his income tax returns.
Therefore, it is advisable to take an education loan in joint names of the parent and the student so as to have the flexibility for claiming the interest.
Where to borrow?
Interest will be eligible for deduction if the loan is taken from any financial institution or approved charitable institution. Interest on loan taken from relatives or friends will not be eligible for deduction. The first category covers all the banks including cooperative banks and one non-banking institution, Credila, a subsidiary of, HDFC Ltd,is also approved by the government for this purpose. There is another category of institutions, which includes charitable institutions and NGOs, from where loans can be taken to qualify for tax benefit on interest.
Consequences of default
In case the loan has been taken for the purpose of your own education, it is very important that you service it properly. Defaults have long-term ramifications for you. Since you are at the beginning of your career and will need to avail many credit facilities, any default will spoil your credit history. This will jeopardise your chances of getting credit in future.
So, now with easy availability of education loans coupled with tax benefits, you can realise your dream of making it big in life.
