Section 80E can help you save tax; here's how

Section 80E allows for the interest paid on Education Loan to not be taken as part of taxable income. See how Section 80E is a boost to education.

With the rising cost of education, education loans have become a fast-growing segment and a rising awareness of the importance of higher education – is making it a rising factor in people's lives as well. The deduction on the interest paid towards education loan is a benefit extended by the government towards encouraging higher education.

As per Section 80E of the Income Tax Act, 1961, an eligible person can claim a deduction of interest paid on education loan taken from approved institutions, for the higher education of specified eligible persons for a limited period. This deduction is made from the income offered to tax, i.e. income which is taxable is reduced to the extent of the amount deductible under Section 80E.

This is the complete information in one sentence. Let's break it down for clarity. All the underlined words need to be explained in simple language for us to know what it means in entirety.

So who is the "eligible person"? Who can legally claim this deduction of interest paid? The eligible person must be an individual who has taken the loan and is paying the interest. This deduction is not offered to a Hindu Undivided Family (HUF) or any other kind of taxpayer or entity under Income Tax.

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The amount deductible from Income is the "interest paid" – which is specifically the amount that is paid towards interest on the loan taken. This does not include the Principal Amount repayment. The Bank gives documentation regarding the loan – terms of the loan, principal repayments and interest payments. The amount that is set towards interest payment only is the amount deductible and hence exempted from tax. There is no upper limit to this amount under the act as this is separate from the ceiling on deduction under Section 80C of the Act.

The certificate given by the bank specifying the amount paid towards interest during the year is an important document and should be attached along with the return of Income as proof of the amount for which deduction is being claimed under Section 80E.

Where can this loan be taken?

The financial institutions are specified as "approved institutions" from whom the loan should be taken, so that the deduction may be claimed. Only when the loans are taken from banks, registered financial institutions in India and approved charitable organisations, and the interest is paid thereon will the interest paid on such loan be deductible under Section 80E. In case the loans are taken from friends, relatives or financial institutions outside India, then the interest on such a loan is NOT allowed as a deduction from taxable income.

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The reason or the purpose of taking the loan must be towards "higher education". Higher Education refers to studies that are pursued after the Senior Secondary Examination. This definition is an inclusive one – and it includes vocational studies, i.e. studies that equip a person towards a particular profession as well as the regular courses. This definition also includes this definition covers higher education that may be pursued in India or even higher education being pursued outside India.

There are certain "specified eligible persons" – and when the Loan is taken for the education expenses towards these relationships – then the interest paid thereon is deductible from taxable income. It is clearly specified that only the loan taken towards the education of self (yourself), your spouse, your children and a person for whom you are a legal guardian are the ones that are eligible under this section for being exempt from tax.

Deduction period

This deduction is available for a "limited period" of time. This limited period is specified as a maximum period of 8 years for which the interest starts being paid on the said education loan. It can be claimed as a deduction from taxable income for the year in which first interest payment is completed and 7 succeeding years thereafter – that makes in total 8 years. If the interest is repaid in a shorter time than 8 years, the deduction will not be allowed thereafter.

That's Section 80E in a nutshell for you.

What are the different types of education loan available in India? Read here.