Section 80E deals with deduction in respect of interest on loan taken for pursuing higher education of the assessee and also the relative of the assessee.
Conditions for claiming deduction:
- Education loan should have been taken from a bank or other financial institution or govt recognized charitable organization for higher education.
- Higher education means full-time graduate or post graduate course in medicine, engineering, management or post-graduate course in applied sciences or pure sciences including mathematics and statistics.
- ·Should be paying interest out of your income for education loan for yourself, spouse, children or anyone whose legal guardian you are.
You can claim income tax deduction on the interest part of your education loan for eight consecutive years.
What is the amount of deduction allowed and for how many years?
Interestingly, provided you fulfill the conditions laid out above, there is no limit on the amount of interest you can claim as deduction under this section. The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier. Therefore, this has to be claimed in 8 successive years by the tax payer or earlier when the interest is paid in full.
You can obtain a statement from the Institution which has provided you the loan to identify the interest payout for each year. Unfortunately no deduction is allowed towards Tuition Fees that you may incur or any amount towards the Principal Repayment of this loan – the deduction is only allowed towards the Interest that is paid on this Loan. However when you pay Tuition Fees towards full time education of your children, that expense can be included as part of deductions u/s 80C.
Your parents can claim a deduction when they take a loan for your education or you can claim a deduction when you take a loan for your own, your spouse or your children education. Since the period of deduction is limited to 8 years and there is no cap on the amount of deduction, it is prudent to wrap up your loan in 8 years and claim as much interest as possible, of course, when you are able to afford the outgo. Note that, the law does not specify whether this higher education has to be undertaken in India or outside India.
Reference:
As Per Section 80E, of the Income Tax Act, 1961-
Deduction in respect of interest on loan taken for higher education.
(1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, any amount paid by him in the previous year, out of his income chargeable to tax, by way of interest on loan taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education [or for the purpose of higher education of his relative].
(2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest referred to in sub-section (1) is paid by the assessee in full, whichever is earlier.
(3) For the purposes of this section,—
(a) “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;
(b) “financial institution” means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf;
(c) “higher education” means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central Government or State Government or local authority or by any other authority authorised by the Central Government or State Government or local authority to do so;
(d) “initial assessment year” means the assessment year relevant to the previous year, in which the assessee starts paying the interest on the loan;
(e) “relative”, in relation to an individual, means the spouse and children of that individual or the student for whom the individual is the legal guardian.