Income Tax Rebate on Education Loan

One such investment that offers lifetime advantages is education. But the cost of education is rising both domestically and abroad, making it out of reach for many. To lessen your financial burden, the Income Tax Department provides a number of tax deductions on student loans. If you have taken out an education loan, you are eligible to get a tax rebate for the interest paid under Section 80E of the IT Act. But only if you adhere to the old tax regime would you be qualified for deductions. While most of the deductions and exemptions that were previously available under the old tax regime have been eliminated, the new tax regime has raised the taxable income slabs. Let's take a closer look at the concept of income tax rebates on education loans.

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Table of Contents

• Income Tax Rebate on Education Loan under Section 80E

• Conditions to Get Income Tax Rebate on Education Loan

• Individuals Eligible to Income Tax Rebate on Education Loan

• Education Loans Eligible to Income Tax Rebate

• Income Tax Rebate Limit Under Section 80E

• Early Repayment of Education Loan

• Conclusion

• Frequently Asked Questions

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Income Tax Rebate on Education Loan under Section 80E

There is a tax incentive associated with loan repayment to entice borrowers to take out an education loan. Under Section 80E of the Income Tax Act of 1961, interest paid on an education loan—which is included in your EMI—can be deducted once you have taken out the loan. This rebate can be taken for up to eight years or until the interest is paid back, whichever comes first. You must obtain a document from the financial institution that details the amount repaid as principal and interest in order to claim a tax rebate for an education loan.

Conditions to Get Income Tax Rebate on Education Loan

The following are the requirements outlined for obtaining tax deductions under Section 80E of the Income Tax Act:

• Section 80 E of the income tax code does not provide a maximum deduction applicable to an education loan. Since you can deduct interest from your taxes, the interest you pay on an education loan is completely tax-free. But only the interest that has been paid, not the interest that has accrued, is covered by this.

  
  

• The education loan should have been borrowed from a bank, an NBFC, or a nonprofit organization in order to qualify for 80E deductions under Section 80E of the income tax code.

  
  

• As previously stated, you have up to eight years to claim an income tax rebate under Section 80E. The loan's term begins the year you begin making interest payments or, if sooner, until all of the interest has been paid. 

Individuals Eligible to Income Tax Rebate on Education Loan

This tax rebate is available to anyone taking out an education loan from a financial institution. Hindu undivided families and businesses are not eligible to receive the 80E deduction. However, it is not allowed to deduct taxes on loans from friends, family, or other acquaintances. You must borrow funds for your own postsecondary education, your spouse's or partner's education, your dependent children's education, or a student you have legal custody of in order to qualify for tax benefits. If your parents divide the EMI payments, you can claim the leftover amount, and they can claim the part of the EMI that they pay in interest.

Education Loans Eligible to Income Tax Rebate

To be eligible for a tax rebate under Section 80E, the loan can only be used to pursue higher education in India or abroad. Any college loan taken out for any other reason will not qualify for tax benefits, under the IT Act's aforementioned paragraph. "Higher studies" refers to any full-time course that comes after passing the senior secondary test or something similar. Graduate or postgraduate degrees in engineering, medicine, management, or any other occupational course are also eligible for loans for these kinds of studies.

Income Tax Rebate Limit Under Section 80E

Similar to how Section 80C and Section 80D deductions are subtracted from your income before determining your total income for tax purposes, the interest component of the school loan can also be subtracted from your income. You can, however, take the deduction up to the maximum amount allowed by the Section 80E exemption. No matter how much you really spent in interest within a fiscal year, you can claim it as a deduction. For example, your total income to compute income would be Rs 4.7 lakh and taxed appropriately if your gross taxable income after other deductions was Rs 6.7 lakh and you repaid Rs 2,00,000 as the interest component of the education loan.

Early Repayment of Education Loan

Many borrowers decide to pay back their loans throughout the whole eight-year tenure. Some people do this because they would rather invest their surplus money than settle their debt. They purposefully prolong the payback time in order to benefit from the tax advantages associated with student loans. This approach is effective for people who think that investing their excess money rather than paying back the interest on their loans will yield a larger return. If you have the expertise to make investments that yield larger returns than the interest rate on your loan, you can also think about using this tax planning strategy. 

Conclusion

The majority of students depend on education loans because of their advantages when they are pursuing higher education. The income tax rebate offered under Section 80E lowers your effective cost on your student loan. Students no longer have to worry about crippling debt in order to pursue their dream institutes' MBA, MBBS, engineering, and many other graduate and postgraduate programs. But only under the previous tax system is the advantage accessible.

Frequently Asked Questions

What is the maximum limit of income tax rebate on education loans under Section 80E?

Section 80E of the Income Tax Act does not specify a maximum amount for the deduction of interest paid on student loans. The real amount of interest paid may be deducted.

What are the documents required to claim a tax rebate for an education loan?

A certificate from the lending institution or another approved charity organization from whom the education loan was obtained must be submitted if you want to take advantage of the tax deductions under Section 80E. This certificate must separately display the principal and interest amounts for the student loans taken out during that particular fiscal year.

Can Hindu Undivided Families (HUFs) get an income tax rebate on education loans?

No, under Section 80E, HUFs are not eligible for a tax refund on college loans. This benefit is only available to individual taxpayers.

How much tax is it possible to save on an education loan?

Section 80E will allow for the deduction of the entire interest component of the loan that is paid back throughout the fiscal year. As a result, the loan's effective interest rate will decrease.

Can an income tax rebate be claimed on the interest on an education loan borrowed for a relative?

The interest component of an education loan taken out for higher education of oneself, one's spouse, dependent children, or a relative for whom the assessee is the legal guardian may be deducted under Section 80E.

Which are the institutions where the loan should be borrowed to get benefit under section 80E?

To receive the advantage under the section, the loan must be taken out for higher education from financial institutions and charity organizations that have been approved for charitable purposes under the Income Tax Act.

Can tax rebate u/s 80E be availed if the loan is taken for higher studies at a foreign university?

Yes, overseas education debts are also eligible for the deduction. The loan must have been obtained from an authorized charitable organization or a recognized Indian financial institution, and the assessee must be an Indian citizen. Therefore, it makes no difference if the course, institution, or university is located outside of India as long as these requirements are met.

Is a tax rebate available if an education loan is from a foreign institution?

No, the loan must be taken out from an Indian bank, Indian financial institution, or a designated Indian charitable organization in order to qualify for the deduction under section 80E.