Section 80E of Income Tax Deductions
Education is vital for every child in the world. And the cost of higher studies has been increasing exponentially. Because of this, if you are planning to take a loan for pursuing higher studies in India or abroad, then you should know that you can claim a deduction under Section 80E of the Income Tax Act, 1961.
Section 80E income tax specifically caters to educational loans taken for pursuing higher studies in India or abroad. This section provides students with some relief when it comes to paying taxes for handling high education expenses that require loans for meeting the necessary requirements.
What Deductions are Applicable Under Section 80E of the Income Tax Act?
One can take education loans on the behalf of his or her spouse, children, adopted children, or a student for whom the taxpayer is the legal guardian. All these parties are applicable for deduction under Section 80E.
Section 80E further mentions that this loan must be taken from a financial or charitable institution. Deduction under Section 80E cannot be availed towards the interest that has been paid to a relative or employer towards a loan that has been taken for higher education.
It should be noted that this deduction is applicable only for individuals. This means that a Hindu Undivided Family (HUF) cannot make a claim for the same. Further, a deduction under Section 80E cannot be claimed by a company or a firm. This deduction can only be claimed by an individual who has availed of the loan for the purpose of higher education.
The Tax Benefits Available Under Section 80E
Any individual who applies for a loan for higher education can avail of the benefit of tax saving that has been provided by Section 80E of the Income Tax Act, 1961. One should remember that he or she can avail deductions under Section 80E even if the maximum available deduction of INR 1,50,000 under Section 80C.
Individuals should also remember that Section 80C provides for deduction in respect of tuition fees paid for education. On the other hand, Section 80E provides for deduction for the interest on loans taken for the purpose of pursuing higher education.
The Eligibility for Tax Deduction Under Section 80E
Only individuals are eligible for tax deductions. Hindu Undivided Families (HUF) and companies cannot avail of deductions under this section. Further, loans taken from friends or relatives are not eligible under this section.
The income tax deduction can also be claimed only on the interest component. This benefit can be claimed by the parent as well as the child who will be pursuing his or her higher education. Some other important points to remember are:
- The deduction can be availed of only if the loan is taken to finance higher education
- The deduction can be availed for only eight years. One cannot claim for deductions beyond a limit of eight years
- The deductions are also applicable only if the loan is taken under the name of the person that is liable for paying taxes
How to Claim Tax Deductions Under Section 80E?
The deduction amount under Section 80E is only applicable to the interest that is paid on the loan taken for higher studies. There is no upper limit on this amount and one can get tax benefit on the entire amount of interest paid. This benefit is not applicable to the principal amount.
Under Section 80E, higher studies refer to education that is taken up after completing the Senior Secondary Examination (SSE). It can include both vocational courses as well as regular courses in India or any other foreign university. This means that loans taken for post-graduate courses in management, medicine, engineering, and applied sciences are all covered under Section 80E.
One can start claiming deductions under Section 80E from the year during which one starts paying interest on the loan for higher education. This means that if you have started paying interest within the same year of borrowing, then one can claim a deduction for the payment of interest on the loan.
The Amount of Deduction Under Section 80E
There is no maximum or minimum deduction limit specified under Section 80E. The amount of deduction on interest payment is not impacted by the rate of interest that is being changed by the financial or charitable institute. Other factors like the amount of loan also do not have an impact on the amount of deduction.
Sometimes individuals also have questions like where they should avail of the loan to be eligible for this tax benefit. Those individuals should remember that they can take the loan from a:
A charitable institution is an institution that is approved for the purpose of Section 10(23C) or Section 80G(2)(a).
These institutions are best described as banking companies that adhere to the Banking Regulation Act of 1949. Other financial institutions that have been recognized and notified by the Central Government can also be categorized as financial institutions.
It should be noted that you should select a reputable financial or charitable institution for availing of a loan for the purpose of pursuing higher education. Any other entity from which a loan is taken will not be eligible for the deduction under Section 80E.
Another great feature that you should be familiar with is that the deduction under Section 80E is claimed at the time of furnishing of income tax return without any documentary proof. However, you should keep your documents ready if you are required to submit the documents to the income tax department for any future scrutiny.
You should keep the sanction documents of the loan with you. It is also a good idea to have easy access to the repayment statements from the financial institution or charitable institution. These statements should have a clear bifurcation of the principal and interest amount that has been repaid. You can also get a deduction by filling the Form 16 if you are a salary class person.