Revealed — How Education Loan EMI can save Taxes for you — Learn about section 80(E)
Last updated on May 9th, 2018
Tax Savings on Education Loan under 80E
Which one of us hasn’t thought about studying at a premier IIM/IIT or wanting our kids to get the best higher education abroad? However, higher education has become expensive and its increasingly getting difficult to source funds without proper planning. Upwardly has created Education Goals cum Investment Plans to help you plan for higher education. If you have not been able to secure funds and the admission date is near, education loans come in handy to achieve quality higher education.
Is It Easy to Get an Education Loan?
The good news is that educational loans are classified as a priority sector by the RBI. This means that a portion of the funds is earmarked in banks exclusively for educational purposes. Loans for up to 10 lakhs for education in India and up to 20 lakhs for education abroad are given at attractive interest rates. This borrowing limit can increase based on the bank you borrow from, but the interest rate will vary. Did you know that there is a way in which you could use this loan as a tax-saving instrument?
How Will It Help with My Taxes?
Section 80E of the Income Tax Act,1961 allows for the deduction on interest of educational loans from your taxable income. Sounds too good to be true?
For example, say you borrowed Rs 10,00,000 rupees at an interest rate of 10%. Given that the repayment period is 6 years, this is what the breakup would look like.
The interest amount can then be deducted by you while filing his returns for each year. While you will still need to give some amount of tax, it can help reduce your tax burden significantly.
The interest of ₹94,235 during the first year can approximately make the below changes:
Points to Remember
· Once the loan is initiated, you have the option to claim a deduction for a maximum of eight years. However, if you have re-paid the interest on the loan before this period, you are not entitled to the deductions.
· There is no upper limit on the amount that can be deducted while filing your taxes.
· The loan can be used to fund any educational venture after higher senior secondary school. This means that courses for medicine, engineering, commerce and even vocational training can be financed through this.
· You can claim the deduction either by foregoing the TDS from your salary or it can be claimed when you file your taxes.
· The loan amount can be secured to fund the educational requirements for yourself, your spouse, children and for those whom you are the legal guardian.
· This type of loan is only available for individuals.
· The deductions do not cover the principal amount.
· Borrowing money from relatives does not qualify as an education loan. Only scheduled banks, financial institutions and charitable institutions qualify as financiers.
· This deduction cannot be claimed for Hindu Undivided family (HUF).
· The tax savings can only be claimed for 8 years
Upwardly Recommendation: Upwardly.in recommends you not to rush to pre-pay your education loans. This deprives you of tax savings. Any surplus that you might have should be used to invest in top mutual funds. These mutual funds will give you 12–15% returns in the long term compared to 8–9% interest you pay on education loans post 80E tax savings.