Income Tax Deduction for Educational Purposes & Loans
Income Tax Deduction for Educational PurposesLoans
The Income Tax Act provides taxpayers with the facility of making a deduction from the taxable income in case the taxpayer or children of the taxpayer have availed of an educational loan. To provide taxpayers with this facility, Section 80E was introduced in the Act. Section 80E deduction is a facility available in the Income Tax Act which provides a tax deduction for educational loans. The Government of India wished to provide a tax deduction on the interest component of an education loan availed for higher studies. For this purpose, Section 80E allows taxpayers to claim a deduction to the extent of actual repayments made on educational loans. The deduction under this section can be claimed on educational loans availed for higher studies of the spouse or children of a taxpayer.
Section 80E deduction is available on the interest component of an educational loan after an individual has started repaying the loan. According to the Income Tax Act, “higher education” means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central Government. An educational loan provided for foreign studies is also eligible for deduction under section 80E. The deduction can also be availed for repayment of loans for vocational training. However, it is important to note that claiming this deduction is possible only if repayment of the loan has actually been made during the financial year.
Eligibility Criteria
The taxpayer must conform to the following eligibility criteria for availing Section 80E deduction:
- Only individuals are eligible for tax deductions under this section. Hindu undivided families, companies and other categories of assessees cannot avail deductions under this section.
- A deduction can be claimed only on the interest component of an educational loan.
- Only those loans availed from recognised financial institutions and charitable organisations are eligible for a tax deduction. Loans obtained from friends or relatives are not eligible for seeking a deduction under this section.
- Loans can be taken by a taxpayer towards fulfilling the educational commitment of either the assessee or the spouse or children of the assessee.
- A deduction can be claimed only if the loan is availed for the purpose of higher education.
- A deduction can be availed only for eight years, beginning from repayment during the first year.
- A deduction can be claimed only if the loan is taken under the name of the taxpayer or the spouse or children of the taxpayer.
Amount of Deduction under Section 80E
The deduction allowed is the total interest part of the Equated Monthly Instalment (EMI) paid during the financial year. A maximum deduction of up to Rs.40,000 can be availed under Section 80E. While availing deduction under section 80E, the taxpayer must obtain a certificate from the bank from which the loan was availed providing details of principal and interest portion of the education loan paid during the financial year.
Period of Deduction
The availability of a Section 80E deduction starts from the year the taxpayer starts repaying the loan. It is available only for seven years starting from the year in which repayment starts or until the interest is fully repaid, whichever is earlier. It should also be noted that even if the assessee’s loan tenure exceeds eight years, then the taxpayer cannot claim the deduction for the interest paid beyond eight years. So it is always advisable that education loan should be fully repaid within seven years.
Section 80E Foreign Education
Section 80E deduction can be availed for interest payment of educational loan even when the student has studied abroad. Hence, the deduction is a major incentive to parents and taxpayers for undertaking higher education in India or abroad.
Income Tax Deduction for Educational Expense
In addition to Section 80E deduction, taxpayers could also claim deduction under Section 80C for any amount paid towards tuition fee for the purpose of full-time education of any two children of the individual. The deduction would be admissible of the amount paid to any university, college, school or other educational institution situated within India. However, payment towards any development fees or donation or payment of similar nature would not be admissible as a deduction.
Section 80C – Deduction for Payment of Tuition Fees
Section 80C allows taxpayers to claim a deduction for tuition fees paid for the education of the taxpayer’s children. The deduction shall be allowed exclusively on the satisfaction of the following conditions:
- The deduction which is available under Section 80C for tuition fees will be allowed only when the assessee is a resident individual. Other categories of taxpayers such as Hindu Undivided Families (HUFs) and corporates cannot claim this deduction.
- The deduction shall be allowed for a maximum of two children. The children should be dependent children of the taxpayer.
- According to the relevant clause of the section, the assessee cannot claim tax benefit for expenditure incurred to benefit himself. Hence, if the assessee has paid tuition fees for his own studies, it will not be possible to claim any deduction.
- The deduction will not be available for the tuition fees paid for the studies of the spouse of the taxpayer.
- An adopted child’s school fees will also qualify for a deduction under this section.
- The deduction is available for Full-Time courses only. Hence, if the taxpayer’s children are undergoing part-time or distance learning courses, a deduction cannot be claimed under this section.
- The deduction can be availed only if the tuition fees are paid to a university, college, school or other educational institution. Hence, for private tuitions, no deduction shall be permitted.
- The deduction is available only when the taxpayer has made an actual payment and not on an accrual basis.
- The taxpayer may pay tuition fees for coaching classes which aim to impart education for admission in professional courses or any other type of vocational or non-academic courses. Such cases are not eligible for any deduction.
- Tuition fee refers to the total fees paid after deducting any payment towards development fees, capitation fees, donations or other payments of a similar nature. Hence, admission fees are not allowed to be claimed as a deduction. Similarly, transport charges, food expenses, hostel charges, library fees, and two-wheeler and car parking charges are not allowed.
- Contributions or donations made to the corpus of the educational institution where the son or daughter of the taxpayer is undergoing education shall not be allowed as a deduction under this section.
If the above conditions are satisfied, the assessee can claim a deduction under Section 80C. The amount of deduction permitted to be claimed will be Rs.1.5 lakh or the amount actually paid as tuition fees, whichever is lower.
To know about Section 80E of the Income Tax Act, click here.
