Getting educated in a premier institute is a costly affair. Course fees and other expenses can be in lakhs of rupees, and many parents or individuals may not have such amounts of money.
For instance: it would cost about Rs20 lakh to complete a postgraduate programme from the Indian Institute of Management, Ahmedabad, one of the country’s best management schools.
Those who don’t have ready cash to finance higher education, can opt for education loans.
The advantage of these loans is that they can be repaid after the borrower, or the student, completes the course and starts earning. Also, interest payments on education loans are tax deductible.
To qualify for the tax deduction, an education loan needs to fulfil three criteria.
First, the loan should have been borrowed only to finance higher education, which means: courses beyond senior secondary education or its equivalent from any school or board or university recognised by government or the local authorities. Also, the course for which loan has to be taken, can be pursued in India or in any other country.
Second, the loan should be borrowed either for self, or for spouse or for the child. Legal guardians can take this loan on behalf of their wards too.
Third, the education loan has to be taken from a financial institution (a bank or a non-banking financial company), or an approved charitable institution [under sections 10(23C) or 80G (2) (a) of the Income-tax Act, 1961].
Money borrowed from relatives, friends or employers does not fall under this category and any interest paid on such loans does not qualify for the deduction.
Besides home loans, repayment of education loan also offers tax deductions.
But, unlike a home loan, in an education loan the deduction is available only against payments towards the interest component of the loan and not the principal amount. The deduction is available under section 80E of the Act, and the entire interest paid on the education loan can be claimed as deduction. But tax deduction benefits can only be claimed for 8 consecutive years, from the year in which borrower starts repaying the loan. To make the deduction claim, get loan repayment certificate from the lender for each year.