Individuals are entitled to claim deduction under section 80E of the Income Tax Act, 1961 on education loan. Section 80E of Income Tax Act allows deduction to individuals for any interest on education loan paid by them in the previous year from the income which is taxable.
This benefit is provided to an assessee in case where the loan is taken for the higher education of his or her relative like spouse or children or for the student for whom the assessee acts like a legal guardian.
Tax benefits under section 80E:
It is a golden opportunity for the assessees to avail deduction for the purpose of education loan. The deduction helps to reduce the tax liability of the assessee. This deduction is allowed to individuals only. It is allowed on the interest part of the education loan paid in the previous year.
The deduction is allowed in calculating the total income for the previous assessment year. It is allowed for eight assessment years including the initial year.
The education loan should be taken from any financial institution or any charitable institution which is approved. The other types of loans are not allowed for the purpose of deduction under section 80E of Act.
Meaning of the term “approved charitable institution”:
“Approved charitable institution” refers to an institution established for charitable purposes and approved by the authorities.
Meaning of the term “financial institution”:
“Financial institution” refers to a banking company to which the Banking Regulation Act, 1949 is applicable or any other institution controlled by the Central Government.
Meaning of the term “higher education”:
“Higher education” refers to any course done after passing the 12th standard from any board or university recognized by the Central or State Government or any local authority authorized by the Central or State Government.
Meaning of the term “initial assessment year”:
“Initial assessment year” refers to the assessment year relevant to the previous year when the assessee began paying the interest part of the education loan.
Meaning of the term “relative”:
“Relative” refers to an individual being the spouse or child of the assessee or the student for whom the assessee acts like a legal guardian.
Conditions for application of section 80E:
The deduction under section 80E can be availed by individuals only if the following conditions are satisfied:
1. Deduction can be availed only by individuals. It is not applicable to HUF or other categories of assessee.
2. The interest part which is paid by an assessee is only eligible for deduction. No benefit is available on the principal amount of the loan.
3. Deduction is available only when actual interest is paid. If interest is paid during the previous year out of taxable income, deduction is available. If repayment is made from an income which is not chargeable to tax, deduction cannot be availed.
4. Loan should be taken from any financial institution or any approved charitable institution. No deduction is allowed for repayment of interest on Loan taken from relatives or friends.
5. Loan should be taken for the purpose of pursuing higher education. It is not allowed for basic education.
6. Loan should be taken for the higher education of spouse or children of the assessee or the student for whom the assessee acts like a legal guardian.
7. The benefit on education loan is available up to eight years. One cannot claim deduction for a period beyond eight years.