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Tax benefit on Education Loan and its peculiarities

Last week, subsequent to my blog post about the tax benefit on tuition fees, I received a few queries from my readers regarding tax break on the education loans.

As there seemed to some confusion, let us understand the difference between the two.

The main distinction, of course, is that one (i.e. Sec 80C) applies to the "tuition fees" that you incur during the year, and the other (i.e. Sec 80E) to the "interest paid on the education loan". 

In short, the nature of expenses are totally different.

First, let's see what the Sec 80E has to say:

Under Sec 80E of the Income Tax Act, you can claim deduction from your total taxable income 
- to the extent of the "interest" paid, 
- "without any limit", 
- on the loan availed by you "for higher education" 
- of "self and relatives".

The applicable provisions, in this regard, are as under:
- The term "higher education" refers to any course pursued (a) after passing the Senior Secondary Examination or its equivalent; (b) from any school, board or university recognised by the Central Government or State Government or local authority or by any other authorised agency. Thus, vocational studies pursued after completion of schooling are also covered. However, part-time or correspondence courses will not get any tax deduction.

- This deduction of interest is allowed for eight years (or earlier, if the loan is repaid in full) beginning from the year when you start paying the interest 

- The lender should either be any bank or financial institution (as recognized under the Banking Regulation Act or notified in the Official Gazette by the Central Govt.)

- The lender could also be any approved charitable institution (as approved under Sec 10 or 80G)
- Relative, under this section, means the spouse, children or a student for whom you are the legal guardian. Loan for siblings' education does not qualify for this deduction.

Now, highlighting some interesting observations:

a. You can take as many education loans as you want and be eligible for tax benefit on all the loans.

b. Unlike home loans where the maximum deduction is restricted to Rs.2 lakhs of interest paid, there is no limit on the interest deduction for educations loans.

c. Of course, there is no tax benefit on the principal repayment of education loans; whereas in home loans even principal repaid is eligible for tax break.

d. While there is no time limit up to when you can claim tax benefit on home loans, in respect of education loans the maximum time limit is 8 years.

e. Tuition fees tax deduction applies only for your children's education. But education loan tax benefit includes you and your spouse too.

f. Only up to two children's tuition fees get tax break. But unlimited education loans enjoy tax deduction.

g. Tuition fees covers even school education. But education loan tax benefit is only for courses after schooling.

h. Tuition fees covers only education in India. But education loan for study abroad is also eligible for tax deduction.

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