A student loan gives you the financial means and flexibility to undertake higher education and pay for it consistently over a longer period. At the same time, it gives you tax breaks that make the refund less costly. However, there are a few caveats associated with using these benefits. Understand the tax exemptions available with the education loan and how to make the most of them.
The first point is that while there is no cap on the amount you can claim, you can only claim tax benefits on the interest paid on the student loan and not on the principal.
Second, only the person receiving the loan can claim deductions. Student loans do not need to be taken out by the student themselves. You can take out a loan for your children or your spouse. So, âif you take out a student loan for your daughter and pay it off, you can claim the tax deduction. However, if your daughter repays the loan from her source of income after starting to earn a living, neither you nor she can claim deductions. This is because the loan is in your name, but the repayment is not made on your taxable income. Simply put, if the borrower wants to benefit from a tax advantage, he has to make sure that IMEs disappear from his accounts, âsays Adhil Shetty, CEO of BankBazaar.com.
Keep in mind that some institutions would allow you to take out a student loan to finance your brother or cousins’ higher education. However, unless you are their legal guardian, you cannot claim tax deductions on the loan.
Third, not all student loans are eligible for tax exemptions. âArticle 80E specifies that only loans from specified financial institutions, including banks and any other financial institution notified by the central government, can benefit from exemptions. Although most of the major NBFCs are on this list, you should make sure that your loan provider is included on this list if you are considering taking out a loan from an NBFC. Money borrowed from family, friends or employers does not fall under the category of student loans and is not subject to exemptions, âsays Shetty.
You can benefit from the interest deduction for up to 8 years from the year you start repaying the loan. If the term of your loan exceeds 8 years, you cannot claim a deduction for interest paid beyond 8 years.
It is therefore clear that the interest paid on student loans obtained to pursue higher education in India or abroad can be deducted from the taxable income of the individual. âThe deduction can be claimed from the year the interest payment begins and ends with the loan repayment or the 8th year, whichever occurs first. It should be noted that these loans should only be given to approved banks / financial institutions / charities. Interest paid on loans from friends and relatives for this purpose is not eligible for such a deduction. A certificate from the institution would be required to justify the amount of interest paid to claim a deduction, âexplains Aarti Raote, partner, Deloitte India.
It may also be noted that loans obtained for oneself or one’s spouse, children and wards would be authorized for this purpose. Higher education has also been defined as study pursued after passing the upper secondary examination or its equivalent from any government-recognized school, commission or university.