Simplifying Tax for C.A's and Taxpayers
Interest on loan taken for higher education eligible for deduction under Income tax act, 1961

Interest on loan taken for higher education eligible for deduction under Income tax act, 1961

Section 80E of the Income tax act, 1961 provides for deduction from gross total income of the assessee for the amount of interest paid on loan taken for higher education, commonly referred to as deduction in respect of education loan

If an assessee being an individual has taken a loan for the purpose of pursuing his own higher education or for the purpose of higher education of his relative, than in computing the total income of the assessee deduction in respect of such interest paid out of his income chargeable to tax be allowed under the section 80E of the Income tax act, 1961.

Amount of deduction and conditions:

  1. Total amount of interest actually paid is eligible for deduction.
  1. Deduction of interest on loan is eligible for assessee own higher education or for higher education of assessee’s relative.
  1. Relative for the purpose of this section means the spouse and children of that individual or the student for whom the individual is the legal guardian.
  1. No deduction is allowed for payment of principal amount under any section of the Income tax act, 1961.
  1. Deduction is allowed even if loan is taken for any course of study pursued in foreign/abroad.
  1. Deduction is allowed for initial assessment year i.e. the first year in which assessee actually started paying interest and seven (7) assessment years immediately succeeding the initial assessment year or until the interest is fully paid by the assessee whichever is earlier.
  1. In case of interest subsidy scheme for EWS (Economic weaker section) moratorium period is determined by bank and in such a cases interest remaining outstanding at the time of moratorium period is allowed as deduction on actual payment basis not on due basis. However this is available for pursuing the technical or professional courses in India after class 12th only under educational loan scheme of IBA.
  1. Actual payment of interest is necessary and interest to be paid shall be out of the income chargeable to tax of the assessee.
  1. Higher education for the purpose of this section means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so.
  1. Loan shall be taken from any financial institution or any approved charitable institution.
  1. Financial institution means a banking company to which the Banking Regulation Act, 1949 applies or any other financial institutions which the central government may by notification in the official gazette specify in this behalf like HDFC Ltd., Credila Financial Services Private Limited.
  1. Approved charitable institution means an institution specified in, or, as the case may be, an institution established for charitable purposes and 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.

Important points:

  1. In case parents has taken loan for higher education for his children and were claiming deduction in respect of interest, but later on his child started paying the installment, than deduction in respect of interest cannot be claimed by the child as child has not taken the loan. In case parent dies and loan obligation is shifted to his child and child is fulfilling the obligation than child can claim the deduction of interest.
  1. In case of loan taken by brother or sister for his or her brother or sister, interest deduction is not eligible unless brother or sister who has taken loan is legal guardian.
  1. Loan taken shall qualify for education loan only. If an assessee takes a loan for higher education against property than also interest can qualify for deduction. What is required is loan shall be for higher education only irrespective of security offered to bank/lender.
  1. Interest deduction is allowable for pursuing higher education including vocational studies even if education is completed before completion of eight years as specified above.

Loan taken from relatives and interest paid on such loan is not eligible for deduction under section 80E of the Income tax act, 1961.

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