Intent behind Section 80E tax deduction
Section 80E of the Income Tax Act, 1961 allows those who’ve taken education loans for higher studies to claim income tax deductions. This is applicable for when education loans are taken to pursue higher education both in India, or abroad. The intent of this provision is to reduce the financial burden on those seeking higher education. Higher education is exponentially more expensive that a high school education, especially if pursued abroad. Not only would you have to pay for the school tuition, you would also have to pay for dormitory or boarding, travel, acquiring study materials, etc. All of this could prove to be a very heavy financial burden and the tax deduction under Section 80E of the IT Act will help ease that burden.
Significance of the Section 80E deduction
Every parent wants their child to receive the best education, right from the elementary school level, to college education. However, it is an expensive affair. As the years go by, the tuition fee and allied educational expenses increase exponentially, making it a huge financial burden. Section 80E of the IT Act aims at providing some form of relief with respect to the financial burden of higher education. Parents across the nation have been able to provide their children with top-notch higher education because of the benefits provided by this provision of law.
What does Section 80E cover?
Section 80E of the Income Tax Act, 1961 allows tax payers to claim deductions on the basis of education loan obtained for higher education. This tax benefit is only applicable to the interest of the loan taken. The deduction under Section 80E is not applicable to the principal amount of the loan. When the yearly taxable income is computed, the amount paid towards interest can be deducted. In simpler terms, the amount paid to repay the interest of the education loan, is not taxed.
Eligibility criteria for Section 80E deduction
In order to enjoy the benefit of tax deductions under Section 80E of the IT Act, you should fulfil the following conditions.
- The claimant should have applied for an education loan for higher studies for yourself, your spouse, child, student or ward.
- The claimant cannot be a Hindu Undivided Family (HUF) or a company.
- The claimant (tax payer) should be the one who applied for the loan.
Documents required to claim Section 80E deduction
The tax payer who wishes to avail tax deductions under Section 80E of the IT Act should provide the government with a certificate from the financial institution or the approved charitable institution who has handed out the loan. This certificate will be accepted as valid only if the principal amount and interest are separately mentioned for the financial year in which deduction is being sought.
When can you claim deduction under Section 80E?
Tax payers seeking tax deductions under Section 80E can claim them from the year they begin repaying the education loan for higher studies. This benefit can only be claim for 8 years since the year you start repaying the loan, or until you have repaid the interest in full, whichever is earlier.
Savings on interest under Section 80E
If you have obtained an education loan for higher studies from a public bank, you can enjoy savings on interest under Section 80E of the Income Tax Act, 1961. The details are as under.
- If your income is over Rs.10,00,000 (which is Rupees ten lakhs only), you can save up to 30% of the interest on loan.
- If your income is between Rs.5,00,000 (which is Rupees five lakhs only) and Rs.10,00,000 (Rupees ten lakhs only), you can save up to 20% of the interest on loan.
- If your income is below Rs.5,00,000 (which is Rupees five lakhs only), you can save up to 10% of the interest on loan.
How can Section 80E benefits be claimed?
If you are a salaried employee, you can claim tax benefits under Section 80E by informing the HR Department or the Accounts Department of your company. They will reduce the TDS cut from your salary. If you are filing your ITR online, you can claim Section 80E benefits there. All you have to remember is that, in addition to the tax deduction form and allied documents, you mention the interest paid the previous year towards the education loan. In other words, the installments of interest paid should be summed and reported, supporting documents may also be given.
Some T&C to claim Section 80E deduction
Given below are a few terms and conditions you should know before claiming tax benefits under Section 80E of the Income Tax Act, 1961. Some of the points have already been stated above, but are being reiterated with additional information because of their significance.
- The tax deductions under Section 80E can be availed with respect to education loan taken for higher education of your children – both biological children, and adopted.
- The tax benefits under Section 80E can be claimed even if you are a legal guardian of the student for whose higher education the loan is taken.
- If the education loan taken has been sanctioned by your employer, or your relative, you cannot claim tax benefits under Section 80E of the IT Act.
- The tax deductions under Section 80E are only applicable to individuals and not companies, HUFs, or firms.
Few important points to consider
In summary, here are a few important points regarding the tax deductions under Section 80E of the IT Act that you should consider before availing them.
- The tax benefit under Section 80E is only applicable to the interest of the education loan, not the principal amount.
- The loan should have been sanctioned in the name of the tax payer availing the tax deductions.
- The tax deduction under Section 80E is only applicable on loans taken towards higher education.
- “Higher education” refers to education pursued after the senior secondary examination, or the equivalent of this exam. It also includes vocational courses.
- The education loan should have been availed from a bank, a financial institution that is notified, or a charitable institution that is approved for the purpose of tax deduction under Section 80E.
- Hand loans taken from friends and families, or anybody else cannot be used to claim tax deductions under Section 80E of the IT Act.
- There is no maximum limit to the deduction allowed under Section 80E.
- It is necessary to obtain a certificate from the bank that separately mentions the principal amount and the interest amount of the loan remitted during that particular financial year.
- The tax benefits under Section 80E can only be availed when the taxpayer begins to repay the interest of the loan amount taken. The benefits extend to 8 years since this day, or until the interest is fully paid, whichever comes earlier.
- Interest that accrues during the moratorium period will get added to the principal amount and the repayment EMIs becomes fixed. In the event that interest is paid during this period, it will be included while the 8-year time limit is calculated.