Higher Education Loan Interest Deduction u/s 80E

By | January 16, 2013

Taking Education loan to cover the cost of education is one of the most convenient and popular method of tax planning not only because it gives the financial support but also at the time of its repayment one can get the deduction of the amount of interest paid on the loan under section 80E of Income tax Act, 1961. The main caveat of this section is that it allows deduction only of interest portion not of the principal portion.  So lets dive into the details with first understanding what actually this section states:

‘80E. Deduction in respect of interest on loan taken for higher education.— 

(1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, any amount paid by him in the previous year, out of his income chargeable to tax, by way of interest on loan taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education.

(2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest referred to in sub-section (1) is paid by the assessee in full, whichever is earlier.

from above main points to avail the deduction are

1) Deduction is available only to Individual Assessee, means you can not claim deduction if you are part of a HUF.

2) The loan should be taken for 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 or State Government or local authority or by any other authority authorised by the Central Government or State Government or local authority to do so.

3) Deduction is available only of the amount of repayment of interest on education loan not of the principal repayment.

4) Deduction will be allowed only when actual interest is paid in the previous year out of income chargeable to tax which means if repayment is made from income not chargeable to  tax than deduction will not available.

5) Unlimited amount can be claimed under this section means there is no ceiling limit on the amount of deduction.

6) Deduction is allowed for a continuous period of eight years, starting with initial assessment year in which the assessee starts paying the interest on the loan or until the interest is paid in full whichever is earlier.

7) Loan should be taken from approved financial institution or from institution established for charitable purposes and approved by the prescribed authority under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G.

8) Loan should be taken by individual for pursuing higher education of self, spouse or his /her children’s or of the student of whom individual is legal Guardian. Hence parents are also eligible to claim deduction of interest paid by them on loan taken for their children’s education.

9) No Deduction is available in case of loan taken by children for the education of their parents.

10) Deductions on education loan can only be claimed if the loan has been taken in your own name. If your parents, spouse or sibling has taken the loan for your studies, then you are not entitled to get tax benefit.

11) The loan includes not only tuition or college fees but also other incidental expenses for pursuing such studies like hostel charges, transport charges etc.

12) There is no condition that the course should be in India.

For the purposes of this section,—

(a)   “approved charitable institution” means an institution specified in, or, as the case may be, an institution established for charitable purposes and notified by the Central Government under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G;

 (b)   financial institution” means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf;

(c)   “higher education” means full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathe-matics and statistics;

(d)   “initial assessment year” means the assessment year relevant to the previous year, in which the assessee starts paying the interest on the loan.’.

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