If you are paying more than one Education Loan, you can get tax exemptions on both, and the tenure to claim such benefit will be calculated separately for each loan. Read on to know more.
Debt is a vital part of personal finance in any individual’s life-cycle. People mostly resort to loans to be able to afford a better future or many a times in trying to pay off existing debts. In fact, loans come as a big relief as it considers your future income capacity and gives you funds to fulfil your requirement.
Education Loan is one such vital loan product which plays a big role as an enabler to help people accomplish their studies by supporting financially at a very low-interest rate. The benefit of an Education Loan, in fact, goes beyond financing the education money. It also allows the eligible person to get tax deduction benefit U/s 80 (E) of the Income Tax IT Act and reduce tax liability in the proportion of the tax slab applicable on the individual.
Let’s check out more on Education Loan and how you can claim tax benefit from it.
How Much Can You Save Under Section 80 (E)?
You are eligible to get tax benefits under Section 80 (E) of the I-T Act if you have taken a loan for higher studies for self, spouse, children or your legal ward. This tax deduction benefit is only available for the interest paid on the Education Loan and excludes the principle amount, similar to Home Loans. It is mandatory that the Education Loan be taken from a scheduled commercial bank or an eligible financial institution. The extent of deduction U/s 80 (E) is the entire interest amount paid on the Education Loan as there is no upper limit to it.
The list of things which are considered for payment under the loan includes tuition fees, examination fees, library charges, refundable security deposit, essentials for education such as study table, books etc., travelling expenses, the cost of computers and more.
Education Loan is not restricted to studies only in India. If the person is going for overseas studies, then too, tax benefit U/s 80 (E) can be claimed.
It is important to note here though, the tax benefit will be available for subsequent seven years of starting the interest repayment or till the period when entire interest is cleared, whichever is earlier. Normally the borrower gets repayment break of a year after completion of the course or six months after getting the job, whichever is earlier. So, the person who wants to claim the deduction benefit can start claiming it immediately from the year he/she starts payment of the interest. So, in all deduction can be claimed for up to eight years after completing the studies (1 year repayment holiday + 7 years for repayment).
In a situation where you have availed two different education loans for your kids, then you are entitled to claim the tax deduction benefit for both the loans and the tenure to claim such benefit will be calculated separately for each loan. A tax deduction is allowed for only the interest paid during the previous financial year and it is not allowed to factor in the interest for next year if the interest was not paid in the previous years for any reason.
You Must Pay Education Loan On Time
As discussed above, if you fail to pay the interest on time, then there is no provision to allow you the tax deduction benefit of such interest. You would pay the interest anyway, but you won’t get the tax benefit on such delayed interest repayment.
So, you must follow strict discipline when repaying EMI’s of the education loan. If you delay repayment of Education Loan, then there your Credit Score may also get negatively impacted. It is better to repay the loan amount on time and maintain a good score so that you can stay financially healthy for getting a bigger loan like Home, Car or even Personal in the future.
Is There Any Benefit In Prepaying Education Loan?
Pre-payment of Education Loan amount should be taken after a serious financial analysis. A lot of factors should be considered before making a pre-payment decision. For example, how much tax benefit would you forgo if you prepay education loan and thereafter how much interest you would be able to save? If you do not repay the loan, then how much more interest you would be required to pay and what’s the maximum tax benefit you will get?
For instance, if you are going to avail a Home Loan and have enough exemption that lowers your tax burden, repayment of the education loan is a better idea. But if you do not have enough investments yet and neither a Home Loan, it is better to keep this as a good tax exemption option. All such questions must be answered before you decide to repay the Education Loan. So, consult your financial advisor to make the correct decisions.