Demographically, India has one of the biggest youth populations combined with a large number of educational institutions. As the economy continues to grow and incomes increase, spending on education is also witnessing a boost. Education expenses account for the second-highest category in a middle-class Indian household. Several people opt for education loans to fund studies, and Section 80E of the Income Tax Act 1961 helps you reduce your taxes when you opt for such a loan.
Section 80E of the Income Tax Act
According to this section, the interest paid during the financial year on the education loan is eligible for tax benefits. The income tax deduction under Section 80E may be claimed for education loans taken for yourself, your spouse, children, and any students for whom you are a legal guardian.
The tax benefits under this section are available only on loans availed from a financial institution or a charitable trust. If you avail of a loan from your relative or friend and pay interest on the same, the 80E deduction benefits are unavailable.
Charitable institutions for this purpose include universities or educational institutes established for education purposes and are non-profit organizations. These may also include institutions or trusts, which are established for religious or charitable purposes, and are prescribed by the commissioner of Income Tax (Exemptions) or Director-General.
Deduction under Section 80E
Having understood what is Section 80E, you need to know that the benefits are available only on the interest component and not on the principal amount on the Equated Monthly Instalment (EMI). You may claim such deductions from the first repayment date and continue using the benefits for seven more years. This means the 80E deduction limits are available for a total period of eight years.
The meaning of higher education as per Section 80E
The section defines higher education as studies pursuant to completing the Senior Secondary Examination or its equivalent. Moreover, the board or the university must be state or government-approved. The course should be a full-time or a vocational program took up after completing the Senior Secondary Examination. Interest paid on an education loan availed for pursuing an international course after completing the Senior Secondary Examination is also eligible for benefits under this section.
Who can claim deduction u/s 80E?
Eligibility for tax deduction under Section 80E
The following are the eligibility conditions for receiving an income tax deduction under Section 80E of the Income Tax Act of 1961:
1. This tax deduction is available solely to individuals; firms and Hindu Undivided Families (HUF) are not eligible. Furthermore, loans from relatives and friends are not eligible for the advantage under this section of the Income Tax Act.
2.Only the interest paid on an education loan is eligible for the Section 80E Income Tax Deduction.
3. This deduction is available to both parents and children. This means that the individual repaying the education loan, whether a kid or a parent, is eligible for the deduction.
4.The deduction is only applicable for loans used for higher education.
5.The Income Tax Exemption under Section 80E is available exclusively to the individual who takes the loan and is required to pay the taxes.
The permitted deduction is the total interest on the EMI paid in a fiscal year. There is no cap on the maximum deduction amount, but an individual must obtain a certificate from their bank to do so. This certificate should provide separate descriptions of the interest rate and principal amount of the education loan for that fiscal year. In this case, there will be no tax benefit for the principal amount; instead, the interest will be eligible.
The quantum of deduction under Section 80E
Section 80E income tax benefit is available only on the interest paid on the education loan. However, there is no upper limit on the amount that may be claimed during the eligible period. You need to procure a certificate from your lender to claim the deduction. It must clearly show the principal and the interest components within the EMI. The interest paid on the education loan must be through your income during the financial year.
Which are notified financial institutions under section 80E?
According to Section 80E, the money used to pay interest on a student loan must come from a financial institution or a non-profit organisation that has been approved. There is no other company from which a loan may be obtained that qualifies for the deduction. These establishments can be recognised as follows:
Financial institution: A financial institution is any bank operating in accordance with the rules outlined in the Banking Regulation Act of 1949, according to the law.
Charity institution: A charitable institution is an organisation that possesses the authority referred to in Section 10’s clause 23C.
What is the period/time limit for claiming a deduction?
A maximum of 8 Assessment Years may be claimed for the deduction under section 80E. However, if you shut the loan account earlier, the income tax deduction. will be valid for the remaining portion of the loan’s active duration.
For instance, you started paying interest on your student loan in Academic Year 2019–20.
For AY 2019–20 through AY 2026–27, you can make a deduction in this situation under Section 80E. (i.e. 8 assessment years).
Documents required to claim tax deduction under Section 80E
The following document is necessary to claim the tax deduction under Section 80E of the Income Tax Act of 1961:
1.An individual must obtain a certificate from the recognised bank or financial institution, or charity institute from which the loan is obtained.
2.This certificate must have separate sections for the principal and interest amounts of the education loan taken out for the fiscal year.
The benefit is available for a period of eight assessment years under the assumption that the course would be complete and the loan would be repaid within this time. Often, education loans may provide a moratorium of six months to one-year post completion of the course. Therefore, repayment may commence only after the end of the moratorium period. In such cases, the benefits will be available from the assessment year when the first repayment is made and seven additional years.
FAQs on section 80E
Can I claim a deduction for the principal and interest amount of the EMI which I am paying for an education loan under 80E?
No, the principal amount of an EMI is not deductible under section 80E. Only the interest portion of the EMI may be deducted.
How much amount can I claim as a deduction under this section?
Three subsections are used to classify tax deductions under Section 80CCD: Contribution of the Employee According to Section 80CCD(1): a maximum of 10% of employee salaries or 20% of gross annual income (for self-employed individuals). The maximum is ₹1.5 lakh.
I want to avail higher education loan for my child, who will study abroad. So can I get a deduction under 80E?
Yes, you can submit a section 80E deduction even if your child is enrolling in normal and vocational courses while studying overseas for a higher education degree..
Is Section 80E part of Section 80C?
The Income Tax Act’s Section 80C allows for a deduction for education-related tuition costs. However, the Income Tax Act’s Section 80E allows for a deduction for interest paid on student loans taken out for higher study..
Can deduction u/s 80E be availed if the loan is taken for higher studies at a foreign university?
No, a loan must be obtained through an Indian financial institution or a certain Indian charity organisation to qualify for the income tax deduction under section 80E.
Key Takeaways
- The individual may claim this deduction for himself, his spouse, his children, and any person over whom he has legal custody. The person making the loan repayments for the aforementioned individuals is eligible for an 80E deduction.
- If the parents split the EMI payments, then the parent paying the majority of the interest can claim that portion of the EMI and the remaining portion can be claimed by the subscriber.
