An education loan is considered not only a fund for higher studies but also plays a vital role in saving tax. As you all know, saving tax is like saving money. By this deduction, the amount of your earnings, which is subject to tax, gets reduced, ergo, reduces the amount of tax that you are liable to pay.
Interest paid on education loan is allowed as a deduction under section 80E. The principal portion is not allowed as a deduction under 80E.
Here are the conditions, which must be satisfied to avail of the deduction/ tax exemption under section 80E:
- The deduction is available only to an individual
- This deduction is towards the interest paid on the loan a person takes for higher studies for himself or his relatives. The interest paid is allowed as a deduction for a total of 8 Assessment Years (it starts from the AY in which the assessee starts paying interest on a loan)
- The loan is required to be obtained from a Financial Institution or any Approved Charitable Authority. A loan taken from family or friends doesn’t qualify for deduction under section 80E.
- The loan should be obtained to pursue higher studies whether such studies are undertaken in India or outside India. Higher studies include all the fields of study pursued after passing the senior secondary examination or its equivalent exam. It includes both
vocational as well as regular courses.
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Let’s Understand the Concept in a Summarised Way:
| Eligible Person – An individual |
| Nature – Deduction from total income chargeable to tax |
| Particulars – Interest paid on educational loan |
| Maximum Amount Allowed for Deduction – No limit specified |
| Maximum Time Limit – For a total of 8 AY (starts from the AY in which interest starts to be paid on such loan) |
| Purpose of Loan – Higher studies (i.e. after passing the senior secondary examination) |
| Mode of Loan – Only from a financial institution or an approved charitable institution {or as approved under Sec. 10(23C) or 80G(2)(a)} |
| Persons covered to undergo higher studies – Individual himself, his spouse, children |
| Location of pursuing Higher studies – Not specified in the section |
For How Many Years Amount of Deduction Allowed & How Much?
There would be no limit on the amount of interest that you may claim under this section if you fulfil all the aforementioned conditions. Either, for a maximum of 8 years or until the interest is paid, the amount is available for deduction. So, whichever is earlier, the interest can be claimed accordingly.
The institution which has given you the loan would have a statement that you can obtain in order to identify the interest payout for each year. However, you won’t get any deduction for the Tuition Fees that are incurred or any amount towards the Repayment of the Principal loan.
Basically, the deduction is going to be done only on the interest that is paid on this loan. However, the Tuition Fees that you have paid for your children’s full-time education would be counted as an expense and are incorporated under Section 80C.
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The deduction can be claimed by your parents if the loan is taken for your education purpose or you can take it for your own higher education, for your spouses’ or for your children’s. As specified, the interval of the deduction is limited to eight years plus there’s no cap on its amount, it would be a wise thought to claim as much interest as possible within the period of 8 years.
Note: The law doesn’t specify whether the higher education has been taken in India or outside the country. One can avail of the deduction in any case.
