Cutting Educational Loan Costs

By BankBazaar | April 3, 2011

The Finance Act of 2007 has brought relief amongst the borrowers of educational loans in the country where in you get a tax benefit for the loan taken to pursue your higher education, or your spouse’s or child’s education. This act was recently amended prior to which, tax benefit was provided only to those borrowers who took educational loans and not a personal loan, to fund their own personal education.

For example, Suraj has taken an educational loan of Rs. 6,00,000 @ 12% interest per annum with an EMI of Rs. 19,929 from a bank for financing post graduate course in engineering for his son. The tenure of the loan is 3 years. He will pay an interest of approximately Rs. 62,494 in the first year and Rs. 54,935 over the next two years.

Suraj can now claim a deduction of the interest from his taxable income under section 80E of the Income-tax Act, with the new amendment in place. In order to claim this benefit, the loan must be borrowed from a financial institution or a Government – approved charitable institution. Loans taken from family, friends or private money lenders will not be eligible for this benefit.

However, it is important to note that educational loans only for certain fields like engineering, medicine, management, or post graduate courses in applied or pure sciences, including mathematics and architecture will qualify for this tax deduction. It is also important to note that the principal loan amount is not eligible for deduction. Only interest paid in the financial year on the educational loan can be claimed as a deduction against your taxable income, without any upper limit.

Also if the tenure of the loan exceeds eight years, no deduction will be allowed for interest paid in the ninth and the remaining years. In this scenario, it is best to repay the loan amount before the 8th year so as to avail maximum financial benefits of the loan.

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