An Individual can plan tax for spending on
education of their spouse or children including legal guardian. One should not
spend out of savings but should take education loan and take benefit of
deduction under Section 80E for payment of interest on educational loan.
Through this tax planning one can reduce cost
of education by reducing tax liability by paying interest on education loan. The
deduction for payment of interest on educational loan under Section 80E is available to an individual only if one
satisfies conditions laid down under Section 80E of Income Tax Act, 1961.
Salient points to be kept in mind while
planning tax deduction under Section 80E:
1. Only
to Individual : Such deduction is available only to Individual and not to HUF or any other assessee.
2. Interest
paid is deductible: The total amount paid as interest is eligible for
deduction and there is no limit for the same. The interest paid is to be
reduced from taxable income so the higher the tax slab of the assessee
borrower, higher the amount of tax saving. So if there is a choice of any of
the parents then higher income parent should borrow for education of their
children. However there is no benefit for repayment of
principal amount of the educational loan.
3. Interest
on loan from Financial Institution or approved charitable Institution only:
Interest on loan taken from any financial institution or any approved charitable institution for the purpose of pursuing higher education by
spouse or children is eligible for deduction under Section 80E. Interest on loan taken from friends
and relatives is not eligible for deduction under section 80E.
a. financial institution includes any
bank or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this
behalf;
b. approved charitable institution includes
any chartable institution established for the purpose of education or an
institution established for charitable purposes approved by the prescribed
authority under clause (23C) of section
10 or an institution referred to in clause (a) of sub-section (2) of section 80G;
4. The Purpose of loan should be higher studies of Individual , Spouse, Children of Individual
or for whom individual is legal Guardian. And Higher studies includes full-time
studies for any graduate or post-graduate course in engineering, medicine,
management or for post-graduate course in applied sciences & vocational studies. Interest paid on education loan taken
for brother or sister or other relatives is not deductible under section 80E.
5. Interest paid on
education loan eligible for deduction upto 8 years; The interest
paid on educational loan is deductible in computing the total income for the eight
assessment years including the assessment year in which interest payment is
started or until the interest is paid by the assessee in full, whichever is
earlier.
6.
Individual borrower can claim deduction: The deduction under section 80E for the payment of interest on
educational loan is allowed to the borrower only. If loan is in the name of
some other person the deduction is not allowed.
7.Loan
taken for incidental expenses for pursuing higher studies is also eligible:
The interest on educational loan qualifies for tax benefits even if taken for tuition fee, college fees and even for other incidental expenses including hostel
charges, transport charges for pursuing such studies in India or abroad.
8. The repayment of education loan is not
deductible under Section 80C.
