Tax Benefits on Education Loan
Here are the tax benefits you can get if you get an education loan to study abroad:
1. Interest Deductions:
You can claim interest paid on the education loan under section 80E of the Income Tax Act on your total taxable income. This will help reduce the overall cost of the loan, as you will pay less in taxes.
2. No Maximum Deduction Limit:
When you claim interest paid on the education loan, there is no upper limit to the amount you can deduct from your taxable income. This means that you can deduct the full amount of interest you paid on your education loan from your taxable income without any restrictions or caps imposed by the tax authorities.
3. Tax Relief:
Once you have claimed the interest deductions from your taxable income, repaying the loan will be easier. Additionally, it will reduce your gross taxable income. For instance, let’s say your gross taxable income for the year is INR 5,00,000, but you paid INR 20,000 in interest on your educational loan. By deducting this INR 20,000 from your taxable income, your taxable income for tax purposes would be reduced to INR 4,80,000. This means you would owe less in taxes because you are being taxed on a lower income amount.
4. Long Duration for Claiming Deduction:
You can claim deductions on the interest paid on education loans for a maximum of 8 consecutive years from the year you start repaying the loan.
5. Reduces the Tax Collected at Source (TCS) Rate:
If you fund your education abroad through an education loan, you’ll only have to pay 0.5% TCS for INR 7 lakh or more. If it were not funded through an education loan, you will have to pay 5% TCS! Imagine the amount of money you’ll save! If you want to save more money, consider sending money through HiWiPay, your support system for outward remittances. They have competitive markup fees and transfer money within 24 hours, unlike banks, which charge 3%-5% markup fees and take 3-7 days to transfer money. They also have a transparent fee structure, so you know how much money you are sending. Visit HiWiPay Website or Download the app now.
6. Loan from a Reputable Institution:
To get tax benefits on your education loan to study abroad, you can request a loan from any reputable financial institution, like banks, non-banking financial institutions (NBFIs), or charitable organizations.
7. Both Student and Co-Borrower Can Benefit:
If your parents took the loan option for you to study abroad, then either one of you can claim the deduction. This provides you with much-needed flexibility and support.
8. Tax Benefit on Early Repayment:
If you repay the loan earlier than your selected time frame, you can become debt-free and establish a commendable education loan repayment track record. This will allow you to take larger loans in the future, and it can reduce your overall tax burden.
Why Should Students Educate Themselves About Education Loans?
There are several education loans for students like you who want to study abroad. They can be broadly classified based on location, course, and collateral.
- Based on Location: There are domestic and overseas education loans to fulfill your dream of studying in your preferred institute.
- Based on Course: Whether you are going for undergraduate, postgraduate, or career development studies, you can get a loan specifically tailored to your course type.
- Based on Collateral: Lastly, you can get a loan based on collateral as well, whether it is a loan against property, deposits, securities, or a third-party guarantee.
All these different types of education loans can leave you confused, unable to choose the right choice for you. This is exactly why you must educate yourself and carefully consider which education loan is the best for your financial situation. Here are some more compelling reasons why you should understand education loans:
- Making Informed Decisions: There are different types of education loans, and you must carefully go through each and every one of them to make an informed decision.
- Financial Planning: Once you have gathered and considered all the terms and conditions, like interest rates, repayment schedules, etc., of the loan, you can start creating a financial plan.
- Avoid Debt Traps: You can avoid potential debt traps and manage your loans responsibly if you have a clear understanding of the implications of the loan.
- Access to Higher Education: Education loans make it easier for you to study abroad. It gives you an opportunity to study abroad, regardless of your background.
- Building Credit History: If you borrow money from the bank and repay it on time, you can build a good credit history, which will help you later in life. A good credit history allows you to get a loan easily.
Financial Institutions Offering Tax Benefits
The above mentioned tax benefits are offered by most financial institutions. Banks like HDFC Bank, State Bank of India, Central Bank of India, Axis Bank, etc., offer tax benefits under section 80E of the Income Tax Act., which allows you to deduct the interest paid on the education loan for abroad studies from your taxable income for up to 8 years.
Coming to non-banking financial companies (NBFCs), some of them do not qualify for tax exemption for education loan for abroad studies under section 80E of the Income Tax Act. If you do want to take a loan from NBFCs and avail tax exemption, look for a NBFC that is notified by the Central Board of Direct Taxes (CBDT).
Read More : Education Loan for Medical Studies Abroad
Eligibility Criteria for Education Loan
The eligibility criteria for education loans for abroad studies typically include:
- Citizen of India: The borrower and the co-applicant have to be Indian citizens.
- Age: The student should be at least 18 years old.
- Collateral: Ability to give collateral (specific cases).
- Proof of admission: Admission must be secured to any professional/technical course before disbursement of the loan.
- Institution: The course and institution must be recognised.
Specific banks and financial institutions may have additional criteria:
- SBI Global Ed-Vantage Scheme: Offers loans for full-time regular courses at foreign colleges/universities, with loan amounts up to Rs. 1.5 Crores. It requires tangible collateral security and includes a processing fee.
- HDFC Bank: Covers the entire cost of education with no upper limit with collateral and up to Rs 45 Lakhs for unsecured loans. It can be used for a wide range of universities and courses across multiple countries.
Remember to check with the respective banks or NBFCs for detailed eligibility criteria and terms.
FAQ for Tax Benefits on Education Loan
Does an education loan save income tax?
Yes, an education loan can help you save on income tax. As per section 80E of the Income Tax Act, you can claim interest paid on the education loan on your total taxable income.
What is the maximum loan amount limit of education loans?
The maximum loan amount limit for education loans for studying abroad can vary based on the financial institution. Typically, it is INR 20 lakhs to INR 30 lakh; however, some institutions might offer more than a crore too.
Please note that after a certain amount, you will have to give collateral as a form of guarantee. Collateral can be a loan against property, deposits, securities, or a third-party guarantee. Also, the actual loan amount can vary based on the student’s profile, course, university, and other factors. It’s always best to check with the specific bank or financial institution for the most accurate information.
Which type of education loan is best?
The best type of education loan for abroad studies depends on the student’s specific needs, financial situation, and the course they plan to pursue. Remember to compare different loan options and consult with a financial advisor before making a decision.
Is it easy to repay an education loan?
Repaying an education loan can be manageable with the right planning and understanding of the loan terms. Here are some factors that can affect the ease of repayment:
Repayment period: It starts after completion of the course and the grace period, which is 6 months to a year long.
EMI structure: The monthly installment is calculated based on the loan amount, interest rate, and tenure.
Moratorium period: In this period, students are not obligated to pay anything. However, this varies from bank to bank.
Prepayment option: Only some banks charge a penalty for prepayment.
What tax benefits are available on education loans?
Education loan offers the following benefits:
1. Interest deductions from taxable income
2. No maximum deduction limit
3. Tax relief
4. Claim deduction up to 8 years
5. When you send money abroad, you will only pay 0.5% TCS for INR 7 lakh or more
6. Both student and co-borrower can claim deductions
7. There is tax benefit on early repayment too
Can tax benefits be availed for any course pursued abroad?
Yes, tax benefits can be availed for pursuing any higher education course abroad.
Is the principal amount of the education loan eligible for tax benefits?
No, the principal amount of the education loan is not eligible for tax benefits in India.
When can I start claiming tax benefits on education loans?
You can start claiming tax benefits on education loans for studies abroad from the year the interest repayment begins.
Are tax benefits available if the education loan is taken from a private lender?
Yes, tax benefits are available for education loans taken for studies abroad from a private lender in India. It should be taken from a reputable financial institution like bank, NBFC, or charitable organisation for higher education,
Can tax benefits be claimed for multiple education loans simultaneously?
Yes, you can claim tax benefits for multiple education loans simultaneously.
Is there an upper limit for claiming tax benefits on education loans?
No, there is no upper limit for claiming tax benefits on education loans. However, this is only applicable for the interest paid for the loan.
Can tax benefits be availed if the education loan is taken for a part-time course?
Yes, tax benefits can be availed if the education loan is taken for a part-time course.
Can I avail tax benefit on education loan for studying abroad?
Yes, you can avail tax benefits on an education loan for studying abroad. However, the loan must be for higher studies.
References:
Works Cited
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“Education Loan Interest Rates, Types, Process, Features and Eligibility.” Cleartax, 23 Feb. 2024, cleartax.in/s/education-loan. Accessed 18 Apr. 2024.
Gupta, Aditi. “What Is an Education Loan in India: Meaning, Benefits & Process.” Leverage Edu, 14 Sept. 2023, leverageedu.com/discover/indian-education-loans/what-is-education-loan-in-india/. Accessed 18 Apr. 2024.
Maji, Priyadarshini. “Can You Get Tax Benefits on Education Loans Taken from NBFCs?” Financialexpress, 16 Nov. 2021, www.financialexpress.com/money/can-you-get-tax-benefits-on-education-loans-taken-from-nbfcs-2370441/. Accessed 18 Apr. 2024.
Mathur, Snigdha. “Education Loan Tax Benefit Option (Section 80-E).” Nomad Credit, 26 Mar. 2024, www.nomadcredit.com/blog/education-loan-tax-benefit-section-80-e. Accessed 18 Apr. 2024.
“Section 80E: Education Loan Tax Benefits.” Cleartax, 12 Apr. 2024, cleartax.in/s/tax-benefits-on-education-loan. Accessed 18 Apr. 2024.
“Taking Education Loans: Pros and Cons Analysis.” Edufund.in, 23 June 2023, edufund.in/blog/pros-and-cons-of-taking-education-loans. Accessed 18 Apr. 2024.
“Tax Benefits on Overseas Education Loan.” Elanloans.com, www.elanloans.com/blogs/tax-benefits-on-overseas-education-loan. Accessed 18 Apr. 2024.
