Section 80E Deduction
Section 80E of Income Tax Act, 1961 explicitly states the availability of tax deductions if an individual applies for an education loan for himself/herself, their spouse, or children from a charitable or approved financial institution. The aim of this particular section under the Income Tax Act, 1961, is to provide some relief and space for taxpayers who are burdened with hefty loans and expenses to support their own or their children's higher education.
Features of Section 80E
Section 80E has been enacted by the government to help taxpayers in availing some deductions on their intended tax amounts and, in turn, provide an air bubble for them to breathe amidst the burden of hefty expenditures.
Provided below is the list of the features of Section 80E to elaborate more upon its role in tax availing of tax deductions:
- The amount of deduction depends solely on the interest paid on the sanctioned loan. It does not depend on the principal sum
- There is no maximum limit on the amount of deduction. The deduction is based on the entire amount that has been paid by a person as interest on the loan
- Section 80E recognizes deductions only on loans taken for Higher Education for both vocational and regular courses undertaken in domestic educational institutions or abroad
- A tax deduction can be claimed from the very year a person begins paying interests
- For those who need time, a moratorium of a year is granted to start the repayment of the loan after the completion of Higher Studies
- Tax deductions can only be availed for a total of 8 years
- Section 80E applies to all kinds of amount, from 1 Lakh to 20 Lakh or even more
- The person or assessee on whose name the loan has been taken is liable to avail the deduction of taxes
- The interest must be paid out of the income of the assessee
On how much amount can rebate be availed?
There is no defined limit on the amount of sum to avail the rebate proposed under Section 80E of Income Tax Act, 1961. The rebate can be of any amount from 1 lakh to more than 20 lacs. The catch is that the loan must be taken to support the expenses of Higher Education. Moreover, the amount is needed to be loaned by a government-approved Educational or Financial Institution.
|Section||Limit of Investment||Types of Avenues for Investment|
|Section 80E||No defined limit; can be availed for a maximum of 8 years||Interest of repayment|
Eligibility Criteria for Claiming Tax Rebate Under Section 80E
Given below is the criteria prescribed for the eligibility to claim Tax rebate under Section 80E:
- A tax deduction can only be availed on an individual basis. Hindu Undivided Family (HUF) and companies are not eligible for rebates under this section. Moreover, loans that have been given by friends and family are not included in this section. The loan needs to be sanctioned by a financial or a charitable organization which is recognized by the Government of India
- An individual who is engaged in paying the loan back is eligible for the tax deductions. The person may be a parent or the child itself
- Tax Deductions will be given only in cases of Educational loans for Higher Education
- The tax deduction will be availed only for eight years by the person repaying the loan
To elaborate more on Section 80E, let us take a quick example. Let us take up a scenario: Akshay is a full-time salaried employee of an esteemed IT company. His daughter Sakshi is 18 years old and has completed her 10+2 exams and is now looking forward to continuing her studies in the field of Electrical Engineering. To support her dreams and to make her educational venture easier, Akshay intends to take an Education Loan. He reaches out to a Government-approved Financial Institution. The bank agrees to sanction a loan of 5 Lakh to Akshay on 10 per cent interest. Now, Sakshi will be able to complete her studies in a secured financial bubble. Moreover, now Akshay will also be able to save up some amount by availing tax deductions under Section 80 E.
How is Section 80E Rebate Calculated?
The rebate that is availed under this section can be calculated in the following manner. Suppose, Akshay earns a salary of 6 LPA and needs to repay an interest of Rs. 50,000 a year on his Education Loan, then this interest of Rs. 50,000 gets subtracted from his total gross income of 6 Lakh. Thus, his net income (taxable) gets reduced to 5.5 Lakh. This implies that the person is availing of a tax deduction of Rs. 50,000.
Note that the income tax exemption can be availed from the month an individual starts to repay his or her loan, and not from the year he or she has taken it.
How to claim the Rebate under Section 80E?
Either a parent or a student can apply for Education Loans depending on the fact of who will repay the loaned sum. Under Section 80E, a particular deduction of tax can be availed in the case of Education Loans. There is only one condition, which is the loan must be sanctioned by a Financial or a Charitable organization, and the Government of India must recognize the institution. Thus, the tax deduction is availed under Section 80E if, and only if:
- The loan is given by a Financial Institution which comes under the umbrella of the Banking Regulation Act, 1949. This includes banks; Government recognized banking companies or Financial Institutions which are mentioned in the official gazette released by the Government of India
- The loan is sanctioned by approved and recognized charitable institutions such as Universities and Educational institutes. Trusts and charitable institutions founded based on religious purposes will also come under the clause 23C of Section 10. The institutions which are mentioned in the Section 80G will also be able to apply for the availing tax exemption
Therefore, the role of this section is to help tax-bearers to relieve themselves from the overwhelming burden that can arise out of the coalition of tax-paying and other expenses of livelihood. It also ensures that a person gets the education he or she wants without any financial hurdles. It exempts the pressure felt by a person to some extent when it comes to managing expenses.
Moreover, an Education Loan, apart from ensuring expenses of studying, will also include expenses of travelling, lodging, and necessary adjacent facilities that may be required by a student during his or her academic session. In turn, Education Loans help in saving taxes by exempting the interest amount that has been paid off the loan.
Ans: Anyone can take a loan for Higher Education under the Income Tax Act, 1961, to avail Section 80E. The loan can be taken for self, spouse, children. The loan can also be taken if you are a children's legal guardian.
Ans: No, there is no upper limit for tax exemption u/s 80E. The deduction can only be availed on the amount of interest and not of the principal.
Ans: The assessee can claim the deduction for eight years since the start of the repayment.
Ans: A Financial Institution is an institution which comes under the Banking Regulation Act, 1949. Therefore, these institutions include Banka and other banking companies that are approved by the Central Government. It also includes the name of the institution, as mentioned in the official gazette released by the Government
Ans: A charitable institution is an institution which is established for charitable and non-profitable purposes and comes under the umbrella of clause 23C of Section 10 or is listed under Section 80G. Universities, colleges are examples of Charitable Institution. These must be approved by the Commissioner of Income Tax (Exemptions) of the Director-General.
Ans: Section 80E sanctions full-time vocational as well as regular courses. To avail the exemption, one must follow the following criteria:
- The loan must be taken for Higher Education (i.e., after the completion of 10+2)
- The local authority must approve the educational institution
- The loan can also be applied for studies in abroad
Ans: The tax deduction under Section 80E can be availed from the start of the year of repayment. Note that it can be availed for the next successive seven years from the start of the year of assessment.
Ans: No, the loan must be taken by an individual. It does not apply to groups or HUFs. The person who gets the loan will be eligible for tax exemptions to be cut from their gross income. After deduction, the person needs to pay taxes only on his or her net taxable income.