Section 80E - Income Tax Deduction for Interest on Education Loan

VISHAL BANSAL 
on 16 January 2019


Introduction-

Section 80E allows deduction in respect of payment of interest on loan taken from any financial institution or any approved charitable institution for higher education for the purpose of pursuing his higher education or for the purpose of higher education of his spouse or his children or the student for whom he is the legal guardian. 

Eligibility and Amount of deduction-

If you are interested in higher education (for self, spouse & children), then you can take loan and claim tax benefits on repayment of interest on Education loan.

  1. There is no restriction on limit of deduction amount.
  2. Deduction is allowed for maximum of 8 years or until the full amount of interest is repaid, whichever is earlier.
  3. Deduction is available to an Individual not to HUF.
  4. Loan should be taken from Registered Financial Institutions or Charitable institutions recognized by Central Government.
  5. Loan taken to pursue higher education in India as well as abroad qualifies for deduction.
  6. Loan can be taken for higher education for himself, spouse and children only.
  7. Deduction is only available if interest is paid out of income chargeable to tax (i.e., deduction under this section cannot exceed the taxable income).

Deduction Period-

The deduction for the interest on loan starts from the year in which you start repaying the loan. It is available only for 8 years starting from the year in which you start repaying the loan or until the interest is fully repaid whichever is earlier. It means if entire payments are done in 5 years only, then tax deduction will be allowed for 5 years and not 8 years.

It should also be noted that if your loan tenure exceeds 8 years, then you cannot claim a deduction for the interest paid beyond 8 years. So it is always advisable that an education loan is paid within eight years.

For the purpose of this section -         

(a) "approved charitable institution" means an institution established for charitable purposes  and  approved  by the prescribed authority  section  10(23C),  or an institution referred  to  in section 80G(2)(a); 

(b) "financial  institution" means a banking company  to which  the Banking Regulation Act, 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 any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so;    

Example-

Mr. Ram has taken an education loan of Rs.5, 00,000/- for her daughter Miss Akshita, from bank on 01.04.2016. The loan has a moratorium period of 3 years. No installments have been paid during the moratorium period; the bank has charged Rs.1, 35,000/- towards interest during the year falling from 2016-2018. If Mr. Ram has paid Rs. 2, 00,000 (Rs. 1, 35,000 towards principal and Rs. 65,000 towards interest) as installment during the year 2018-19, what will be the amount of deduction under section 80E?

Answer-

During the financial year 2018-19, Mr. Ram has paid Rs.2, 00,000 as installment, out of which Rs.1, 35,000 towards principle repayment and Rs. 65,000 towards interest. So, the deduction is available under section 80E will be Rs.65, 000/- only.


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