Deduction under 80E

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Anita (Querist)
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06 July 2009 Is there any criteria to be fulfilled regarding the educational institution for which the loan is being taken? Can the deduction be applicable for loan taken in india for higher studies abroad?

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06 July 2009 Hi Anita,

Here is what you need to know when looking at the tax angle, please refer highlighted text below.
The first question that comes to people's minds when they take a loan is: Will I get tax benefits on it?
If it is an education loan, you do.
Who took the loan?
You will get the tax benefit on an education loan only if the loan is in your name. You cannot claim the tax deduction if the loan is taken for someone else, be it your spouse or children or even a sibling. Only the person for whom the loan is valid will get the tax benefit.
So, if you take an education loan, you -- and not your parents or whoever took the loan -- will get the tax benefit when you start repaying it.
The tax benefit
If you take an education loan, you can claim deduction under Section 80E of the Income Tax Act. You will get a tax benefit on the interest you pay.
Initially, there was a limit on the tax benefit. The lesser of the two amounts would be valid for deduction:

i. Total amount paid during the year (principal repaid and interest paid)
ii. Rs 40,000
Now, this had been done away with. The interest you pay will be deducted from your income; there is no limit any more. It will reduce the tax you have to pay.
No deduction, however, is now available for the principal repayment.
The good news: Interest can be deducted and there is no limit to this amount.
The bad news: The principal amount is no longer eligible for deduction.
Do remember, repayments on your education loan are NOT covered under Section 80C. As mentioned above, they are covered under Section 80E of the Income Tax Act.
The time period
The deduction mentioned above will only be applicable when you start repaying the loan.
These deductions are available upto eight years totally. You cannot claim the deduction for more than eight years.
So, even if you have a repayment time frame of 10 years, try and repay your loan within eight years. Unless, of course, the loan amount is too high for you to afford a higher repayment amount every month.
Do note you cannot claim any tax deduction if your employer gives you a loan. Ditto for family or friends. You get these tax benefits only if the loan is from a financial institution, bank or approved charitable institution.
Section 80E
DEDUCTION IN RESPECT OF REPAYMENT OF LOAN TAKEN FOR HIGHER EDUCATION.
(1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, any amount paid by him in the previous year, out of his income chargeable to tax, by way of repayment of loan, taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education, or interest on such loan :
Provided that the amount which may be so deducted shall not exceed twenty-five thousand rupees.
(2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until loan referred to in sub-section (1) together with interest thereon is paid by the assessee in full, whichever is earlier.
(3) For the purposes of this section, - (a) "Approved charitable institution" means an institution specified in, or, as the case may be, an institution established for charitable purposes and notified by the Central Government under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G;
(b) "Financial institution" means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf;
(c) "Higher education" means full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics 1002f ;
(d) "Initial assessment year" means the assessment year relevant to the previous year, in which the assessee starts repaying the loan or interest thereon.