Do You Know an Education Loan Can Get You a Tax Benefit

An education loan is the easiest way to finance your academic aspirations. It opens up the world of higher education to pursue locally and overseas. It allows you to experience college life and permits you to gain access to education at a higher level. 

An education loan also allows access to better educational institutions which have good:

• Teaching staff and faculty members
• Facilities and infrastructure
• Quality of education delivered
• Extra-curricular activities and opportunities

An education loan also helps you with the very high costs of higher education nowadays. This is because an education loan allows you to pay for it through EMI instead of paying at one shot.

An education loan not only pays for your higher education but also offers you tax gains. You can claim tax deductions irrespective of whether you are a student or a parent as long as you meet the requirements. This article showcases and explains the tax benefit aspect of an education loan. 

Eligibility to claim tax benefit

According to the law established by RBI, only individuals are eligible to claim a tax benefit. Joint loans are not taken into consideration when it comes to deductions.

Apart from this restriction, only the individuals who fit the following criteria can qualify for tax benefits. It is per Section 80E of the Income Tax Act of 1961.

• Parents who co-sign or is the lead borrower on an education loan for their children.
• After getting a job, a student who took out an education loan can deduct this from their taxable income.
• A loan that is being paid by a spouse
• A legal guardian who is repaying a loan for the person for whom they are responsible may also be eligible for tax benefits.

Purpose of the loan

The reason behind taking the loan also impacts whether you can avail the tax benefits of an education loan. Only a loan that is taken to finance your higher education is eligible. Other types of education loans cannot be used to get tax benefits. 

Higher education is a full-time study you undertake. it is usually done after the senior secondary exam or its equivalent. This comes under the category of undergraduate loans. Any post-graduate degree you choose to pursue is also included in the education loans.  This is also deemed suitable for tax benefits.  

Additionally, you might also get tax breaks for vocational training or career development loans. The latter involves taking a break from work to enrol in courses, modules, or training to develop their skills further or learn new ones. Thus, it is clear that tax benefits are provided for most fields of study when taking an education loan. 

Tax Benefit Amount

It is important to note that when it comes to student loans, the tax advantages are only applied to the interest paid on loans. The tax benefit is not available for its principal sum. But, given that there is no cap on how much money you can save in a particular fiscal year, you can deduct all interest due. This compensates for the lack of tax advantages on the principal repayment. This makes an education loan a viable choice when seen from a tax-benefit point of view. 

Tax Benefit Duration

Tax benefits on a student loan are only available for a limited time. Even though the time frame is quite long, it is good for you to know about it in advance. This allows you to plan the process of paying back your loan in a more financially sustainable manner. 

Simply put, the first year of repayment is when you begin making EMI payments on your education loan. Interest can only be deducted from your taxes for a maximum period of eight years, including this first year.

For instance, if you pay back your loan in six years, you will only be eligible for the tax benefit for six years. Or, if the loan tenure exceeds eight years, you will only be provided with the tax benefits for eight years.

Origin of funds

The place or institution from which you choose to take the student loan also plays an important role. The tax benefits are only available if the loan is from a bank or authorized financial organization. Section 80E tax deductions are not available on all education loans. 

If you borrow money from friends or family to pay for your higher education, you will not receive any tax benefits when you repay them. This is because the government does not consider them to be eligible organisations. You should also use extreme caution when obtaining a Non-Banking Financial Institution (NBFI) loan. You should check to see if it is on the list of financial institutions that qualify for tax breaks.

Concluding Remarks

Pursuing higher education is an important and memorable experience for each student. It is crucial whether it is local or international. You may extend the time you have to pay for it by financing it with a student loan. Making the most of the loan financially is necessary.

You should thus make every effort to qualify for the tax advantages that come with the student loan. This reduces the financial burden of repaying the loan, increasing the appeal of an education loan.

You can read more about student loans and other types of financing from the Piramal Finances page. They can help you to understand further how to manage and explore your finances in the best way.