When you’re planning on pursuing higher education in the country or even abroad, a Personal Loan for education is the quickest way to finance your dreams. Besides funding your higher education, a Student Loan also comes with excellent tax benefits for the primary or the co-borrower.
Whether you are a student or a parent, you are eligible to avail tax deductions on the total interest component of the loan repayment. Here’s what you need to know about tax benefits on Education Loan in 2022.
As per the regulations, only an individual can claim a tax benefit, and no deductions are applicable on joint loans. Having said that, you can claim tax benefits under Section 80E of the Income Tax Act, 1961, if you are:
- A parent taking the loan for their children as the primary borrower or co-signee
- A student taking the loan can claim this deduction after getting a job from his taxable income
- A spouse paying the loan
- A legal guardian who is paying off the loan for the child can claim tax benefits
Purpose of the loan
Under Section 80E, you can only avail of a tax deduction for Education Loans taken for higher studies in India or abroad. Higher studies include any full-time course you wish to pursue after passing the senior secondary exam or its equivalent from a recognized board. It also includes any post-graduation degree you wish to apply for. Besides, you can avail of tax savings for vocational courses.
When it comes to a Student Loan, you must remember that the tax benefits are only available on the Interest component of the loan and not the Principal amount. In a given financial year, you can claim the entire interest payable for a tax deduction, and there is no upper limit to your savings. This makes up for the lack of tax benefits on the Principal repayment, making it an affordable option.
Tax deduction period
Education Loan tax benefits are only available up to a certain period. Simply put, the year in which you start paying the loan through EMIs, is considered the first year of repayment. Now, including this first year, you can only claim a tax deduction on interest for a maximum of 8 years.
For instance, if you repay your loan within 7 years, the tax deduction will be available for only 7 years and not 8 years.
Source of finance
The tax deductions under Section 80E are not available on all Education Loans, which is to say, the tax benefits are only applicable if you have taken a loan from a Bank/financial institution or any approved charitable institution. You cannot avail of tax savings on loans taken from friends or family for higher education.