Education Loan Tax Benefit For Indians: Smart Debt & Taxes
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Education loan tax benefits can be a game-changer for Indian students and their families, providing valuable financial relief during the pursuit of higher education. By taking advantage of deductions, credits, and exemptions offered by the tax code, borrowers can substantially reduce their tax liabilities and ultimately ease the burden of loan repayments.
Road trips, making friends for life, finding yourself and maybe occasional classes – these are what come to most of our minds when we think of college life. However, struggling to pay your tuition fees can be a wet blanket to all that your college experience has to offer.
In times like this, taking an education loan is pretty smart, especially when there is a chance of an education loan tax benefit!
Read along to learn more about education loans, how to take one and the smartest move to go easy on your pockets.
Education Loan Tax Exemption: What is it?
An Indian education loan is the money a bank lends a student to easily pay for all college expenses.
Isn’t it sweet? They basically fight to pay for you. So before you settle for any of them, learn about education loan exemptions like a collateral-free loan, income tax rebate on education loans, and the education loan tax benefit limit.
Broadly speaking, there are two types of education loans: Domestic and Study Abroad. What you choose is mostly based on whether you want to gain global exposure or increase your network domestically. Both usually cover standard tuition fees and some living and transport costs as well.
If we’re getting specific, there are three types of Education Loans in India based on the level of education you want to pursue:
- Undergraduate loan: For students seeking a bachelor’s degree of three-five years.
- Graduate student loans: This is financial aid given to anyone pursuing a master’s degree after their bachelor’s. You are required to start repaying this loan after a grace period of six months of leaving your school/college/university.
- Professional education loans: These are offered to those wanting to pursue education related to their professional careers.
Although Indian education loans do not offer a tax exemption on the principal loan itself, they offer an education loan tax benefit on the interest rates paid when repaying.
Secured & Unsecured Loans
Secured and unsecured Indian student loans are two distinct types of financial assistance available to students to fund their education. Each option comes with its unique characteristics and considerations, catering to different financial circumstances and risk preferences.
When you’re travelling by auto, and you don’t have enough money, you run to your house to get the cash. While you do this, you ask your friend to stand near the auto so the bhaiya trusts you to return with the money, right? Your friend here is the collateral.
When banks lend you money, they ask you to provide some security to hold as collateral to ensure that you repay the principal loan + interest. This could be the evidence of property, cars, or anything worth the same amount as the loan in assets. The interest rates on the loan vary between 8.2% to 13% across public and private banks.
Some banks allow you to take the loan without collateral, but the interest rates are usually higher, say, 10.5% – 16%.
Choosing between a secured and unsecured student loan depends on the borrower’s specific financial situation and comfort level with offering collateral. Both options aim to provide students with the financial support they need to pursue their educational goals, but it is crucial to carefully consider the terms, interest rates, and repayment options before making a decision.
You can also read: Understanding Tax Collected at Source
Section 80E Education Loan: What does it mean?
Let’s not even pretend – we all love freebies and special considerations. So, if there’s a way to be exempted from the tax on your Indian education loan interest, why wouldn’t you jump at that?
Section 80E Education Loan operates as special criteria under the Income Tax Act of India. It is an education loan tax exemption, which means that it deducts not the loan directly but the interest you pay on that loan. This education loan deduction can be claimed from the year you start repaying the loan to up to 8 years. (Hopefully, Sherlock Season 5 would have been released by that time!)
Education Loan Tax Benefit? Sign me up!
Firstly, only an individual (not their family unit or other taxpayers) is eligible for Section 80E tax exemption. But don’t worry, if your parents are taking out this loan for you, they would be eligible for education loan tax exemption.
There are no limitations to the university, course or field of your study to avail of the education loan exemption on your interest amounts. As far as the education loan tax benefit is concerned, all degrees are considered equal. Furthermore, there is no limit on the minimum or maximum amount you can claim as an education loan deduction. However, the education loan income tax benefit is valid only for eight years from the time you start repaying your loan, after which you are required to pay the full tax amount.
Education Loan Deduction & Repayment
Section 80E education loan allows you eight years to repay, which is a lot of time to study, explore, find a job, switch your job, and earn enough to pay back comfortably. This means that if you’re starting off with an Engineering degree, it gives you enough time to find your passion in filmmaking by the end of this rebate on education loan.
When you sign the loan papers, your ride-or-die (AKA: your parent) signs it with you. For safety, they can bring their own ride-or-die with them, too. These two people are your loan ‘“co-applicants” or “co-borrowers”. It convinces your bank to sanction your loan when two people back you up. And yes, the co-applicant is eligible for the income tax rebate on education loans too. If your ambition and drive aren’t enough to support you, the education loan tax benefit most definitely will be!
Education Loan Income Tax Benefits: How to Claim them?
When banks fight to support your education loan with tax benefits, at the risk of sounding like Lady Whistledown, you need to be cautious and well-informed on who you pick.
Here are the steps to getting your loan:
- Research your banks There are heaps of banks at your disposal that draw you in with compelling offers on their education loan deduction plans. Research your lender thoroughly, compare their offers, and choose the one that caters to all your educational needs the most.
- Fill out their application forms You can get these forms in person or online. When you go through them, don’t hesitate to have an informed adult read through them with you and fill out all your information accurately.
Here are the essential documents you might need:
- Identity proof: Aadhaar, PAN, Indian Passport, or any Government document stating your proof of identity and address.
- Academic records: We know you’re an academic weapon. But your bank needs proof in the form of Transcripts, Transfer Certificates, special certifications and anything that will support your claim as someone who values education.
- Financial documents: Bank statements, Income Tax documents, and any relevant financial documents to show as proof of your income and stability of finances over the recent years.
- Collateral proof: Property or asset documents if you’re pledging collateral for a loan.
- Interview time! Nothing to be nervous about. They just want to know what you’re about to study and your general idea about where your education might take you. You can use this opportunity to clarify any doubts you might have about education loan tax benefits and income tax rebates on education loans as well.
- Bank approval After the bank checks the credibility of the documents, the student, the loan-applicant and the co-applicant, the bank is all set to approve your education loan! The final step is to write a promissory note to the bank, which is just a way of officially pinky-promising them that you’ll pay them back.
- Loan Disbursal When the loan is approved, the bank sanctions the education fee directly to the chosen University. This will either be done semester by semester or for the course in its entirety.
- Start filing your ITR with an education loan tax exemption When you file your income tax return, mention the interest amount paid to claim your education loan income tax benefit. Alternatively, you may get assistance from a chartered accountant to file an ITR.
The bank or financial institution might take some time to go over your documents, so just sit back, relax and take time to plan a successful future after your education!
To truly avail of the education loan tax benefit, get an interest payment certificate from the bank.
In a Nutshell
Research banks offering education loans, compare their offers, and fill out application forms with essential documents. Attend the interview to clarify doubts about tax benefits. After approval, the loan is disbursed directly to the university. File income tax return, mentioning the interest amount paid, and obtain an interest payment certificate from the bank for tax benefits.
Key Takeaways
So imagine that you want to join your dream course, and the fee is ₹10 lakh. You take out a loan from a reliable bank offering you 10% interest. You are still required to repay the whole ₹10 lakh within eight years of beginning to repay your loan. However, our heroic Section 80E Education Loan part of the Income Tax Act allows you rebate on education loan, letting you forgo the 10% interest you need to pay on EMI.
Read up well, and refer to trusty official websites and financial experts to help you in this process!
Also, congratulations and best of luck on your education journey!
Frequently Asked Questions
Yes, the education loan tax exemption is limited to an education loan taken for two children. However, if both parents are taxpayers, the income tax rebate on education loan is applicable for four children.
Yes, the rebate on education loan is applicable for education loans taken to study both in India and abroad.
Yes, you can claim an education loan deduction on your interest for any loan taken for the education of your spouse, parents, and children. The tax rebate on education loan is also applicable to anyone you signed the loan for as a co-applicant.
Yes! The Indian education loan tax benefit is structured to aid students in any type of education, including vocational and skill development courses.
