Section 80E of the Act lays down the features and conditions applicable for availing tax deduction on interest for education loan
We all want to give a good upbringing and education to our children. Typically, children’s education, especially higher-education, is funded out of savings and investments or by way of an education loan.
Recognising the interest burden arising from an education loan, the Income-tax Act, 1961 (‘Act’) provides tax incentive for such interest paid by an individual.
Section 80E of the Act lays down the features and conditions applicable for availing tax deduction on interest for education loan.
Amount eligible for tax benefit
Tax benefit is on the amount paid in the financial year as interest on loan taken by an individual pursuing higher education or higher education of a relative.
Pre-condition for claiming the tax deduction is that the loan should be in the name of the individual and the interest should be paid out of the taxable income. It is important to note that repayment of principal amount is not covered under this section.
Definition of higher education
Tax deduction is allowed only if the loan is taken for the purpose of ‘higher-education’. The term ‘higher-education’ has been defined in Section 80E to mean any course of study pursued after passing the Senior Secondary Exam (SSE), also known as Higher Secondary Examination or Class 12 or the 12th Board.
The SSE/ class 12th exam could be conducted by any School, Board or University recognized by the Central or State Government or a local authority to do so.
Keeping up with the changing times, the term ‘higher-education’ now includes any part-time/full-time course in any discipline pursued by the student.
This could be a diploma, a graduation, post-graduation course, offered by any University, Institute or Organization.
Interestingly, prior to 1st April 2010, ‘higher-education’ included only full-time studies for any graduate or post-graduate course in specified disciplines such as engineering, medical, management.
Definition of relative
Tax benefit can be availed for financing the individual’s own higher-education or the higher education of the relative. For this purpose, ‘relative’ means the spouse and children of the individual or the student for whom the taxpayer is the legal guardian.
The deduction can be claimed only if the loan has been taken from a bank, any financial institution or any approved charitable institution as defined under the Act or notified by the central government for this purpose.
Therefore, deduction shall not be available under Section 80E if the education loan is taken from employer, family, friends or other non-specified sources.
Period for which deduction can be claimed
The deduction under this section is allowed for a period of 8 tax years, starting with the year in which the first payment is made or until the entire amount of interest is paid, whichever is earlier.
Expenses covered under the loan
The education loan may be taken for tuition or college fees or other expenses such as hostel charges, transport charges etc and entire amount of interest can be claimed as deduction irrespective of the rate of interest on which loan for higher education was taken.
Applicability for higher education outside India
Even if loan is taken for higher studies outside India, interest payments in respect of education loan shall be eligible for deduction under section 80E of the Act. As per a recent judgment in ‘Nitin Shantilal Muthiyan vs Deputy Commissioner of Income Tax’ Pune tribunal has made it clear that higher education can be for studies outside India also under section 80E of the Act.
Other tax benefits
Apart from above, Section 80C also includes a deduction of up to Rs 1.5 lakh for tuition fees paid to any university, college, school or other educational institution in India. The amount paid by an employer towards ‘children's education allowance’ also qualifies for an exemption of Rs 100 per month per child subject to a maximum of two children.
(The author is Partner, KPMG in India. Amit Gupta, Manager, also contributed to the article. The views expressed by them are personal)