Did you know that you can save taxes on the interest payments made toward your education loan? Section 80 E of the Indian Income Tax Act, 1961 allows for the interest paid on student finance as a deduction from your total income. There is, however, no tax benefit on the principal part of the education loan EMI. The tax savings benefits are available to individuals who have taken education loans for the higher education of self, spouse or children, or students for whom they are guardians. Let us find out about education loan EMIs, their components, and the portion on which tax savings can be claimed.
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Education Loan Basics
Different banks and lending agencies offer education loans to students wishing to pursue higher studies in India or abroad. These loans are approved if the applicant meets all the eligibility norms relating to age, course, credit score of self or parents (who are the co-applicants). These agencies prefer to give funding to those students who have got admission to prestigious or recognised universities or courses and have high chance of getting a good job.
The loan amount depends on the fees of the course that an applicant has been selected for plus the cost of living, the cost of books, and any other expenses associated with the education. The student loan interest rates are dependent on several factors including the loan amount, the duration, the creditworthiness of the applicants, and the course in which the applicant has enrolled.
Education Loan EMI
The EMI or the Equated Monthly Instalment is the fixed amount paid by an individual towards the repayment of a loan. The amount is generally fixed for the whole tenure of the loan but a major component of the EMI in the initial years goes towards the interest cost.
The EMI for these loans is calculated based on the loan amount, duration, and the applicable interest rate. Applicants can easily use the student loan EMI calculator to find out the EMI payable. The EMI is calculated based on:
- The loan amount,
- the duration of the loan, and
- the applicable rate of interest
Any change in even one of these components will give a new EMI amount. The EMI has two components- one which is used to repay the principal amount and the second that is used to meet the interest cost of borrowing.
Tax Savings on Education Loan
While calculating education loan tax savings, what needs to be remembered is that the tax deduction on education loans is allowed only on the interest part of the EMI paid during a financial year. There is no limit on the maximum amount that can be claimed for a tax deduction. For claiming tax benefits, the taxpayer needs to submit a certificate from the lending agency that provides details of the principal and the interest portion of the education loan.
The deduction for the interest on a loan is available from the year in which the loan repayment starts and is available for only 8 years or the period until the interest is fully repaid whichever is earlier. In case, the whole loan is repaid in 6 years, the tax savings benefit is available for that period only. The tax savings from education loans can be maximised by ensuring that the education loan is repaid within 8 years.
