Section 80E of Income Tax Act: Deduction for Interest on Education Loan

Section 80E of the Income Tax Act, 1961, provides tax benefits on education loans by allowing individuals to claim a deduction on the interest paid, either for themselves or their relatives.

Key Highlights

• Tax Regime: This deduction is applicable only under the old regime.
• No Limit: The entire interest amount paid in a financial year can be claimed, with no maximum cap.
• Duration: Deductions are allowed for maximum 8 years from the year repayment begins.

What is Section 80E Education Loan Deduction?

Section 80E of the Income Tax Act provides for the deduction of interest paid on loans taken for higher education. Irrespective of whether the loan is taken for himself or for his relative, the assessee can claim this deduction. There is no specified upper limit for this deduction; the entire interest paid on an eligible education loan can be claimed. It can be claimed for a maximum of eight years, beginning from the year interest repayment starts. This deduction is available only under the Old Tax Regime.

Eligibility for 80E Deduction on Education Loan

• Only individuals can claim a deduction on an education loan. No other person, such as Hindu undivided families and companies, is eligible to claim the 80E deduction.
• The loan should be taken for the higher education of oneself, spouse, children, or a student for whom the individual is a legal guardian.
• The 80E deduction can be claimed only if the education loan is taken from a recognised financial institution or a charitable organisation, and not from friends or relatives.
• Loans must be taken for higher education (Education after 12th Class).
• Deduction can be claimed for a maximum of 8 years.
• It would be available only to those who have opted for the old tax regime.

Where Should You Take an Education Loan From?

Section 80E deduction is eligible on interest paid on a loan only from any bank/financial institution or any approved charitable institution. Loans taken from friends or relatives for higher education do not qualify for this deduction.

Purpose of Education Loan

You will be eligible to claim an education loan deduction only if it is taken for pursuing higher studies. It does not matter whether such an education loan is taken for higher studies in India or outside India.

Higher studies encompass all fields of study pursued after passing the senior secondary examination or its equivalent. It includes both vocational and regular courses.

Maximum Tax Benefit Under Section 80E

You can claim a deduction for the entire interest paid in a financial year. No maximum cap (unlike Section 80C, which is limited to Rs . 1.5 lakh).

Example:

• Gross income after other deductions = Rs. 6.7 lakh
• Interest paid on education loan = Rs. 2 lakh (estimated)
• Taxable income = Rs. 4.7 lakh

Documents Required Under Section 80E

• The deduction allowed is the total interest part of the EMI paid during the financial year. There is no limit on the maximum amount that can be deducted.
• You, however, need to obtain an interest certificate from your Bank. Such a certificate should segregate the principal and the interest portion of the education loan paid by you during the financial year.

Period of Deduction

• The deduction for education loan interest under Section 80E begins from the year you start repaying the loan.
• It is available for a maximum of eight years or until the interest is fully repaid, whichever comes first.

Example: if the loan is fully repaid in five years, the deduction is allowed only for those five years. On the other hand, if the repayment period exceeds eight years, no deduction can be claimed beyond the eighth year. Hence, it is advisable to repay education loans within this period to maximise tax benefits.

Early Repayment of Education Loan

Under Section 80E of the Income Tax Act, taxpayers can claim a deduction for interest paid on an education loan for up to 8 years from the year repayment begins, or until the loan is fully repaid, whichever comes earlier.

Some borrowers should extend their repayment period to maximise their tax benefit. Instead of pre-paying, they channel surplus funds into other investments, expecting higher returns compared to the loan's interest cost. This approach suits individuals who are confident in their investment skills and are willing to optimise both tax savings and wealth creation opportunities.

On the other hand, if your primary goal is to become debt-free and build a solid credit track record, early repayment is the more intelligent choice. Clearing the loan sooner not only reduces your interest burden but also improves your financial profile, which can be beneficial when applying for bigger loans in the future, such as a home loan.

Conclusion

The government has taken steps to promote accessibility to education by providing easy access to education loans and offering tax benefits on loan repayment. These measures aim to make education accessible to a wider population. Education loans are beneficial not only for students but also for individuals who are employed and aspire to pursue higher education after gaining some work experience.

Related Articles:
1. Income Tax Deductions List - Section 80C
2. Section 80EEA - Deduction for Interest Paid on Home Loan 
3. Section 80D - Deductions Under Medical Insurance
4. Section 80EE - Deduction for Interest on Home Loan
5. Section 80CCD - Deductions under NPS & APY
6. Section 80TTB - Deduction for Senior Citizens
7. Section 80TTA  - Deduction on Interest
8. Section 80GG - Deductions for Rent Paid
9. Section 80U – Tax Deduction for Disabled Individuals