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How to enjoy Income Tax benefits with your education loan in India

An education loan not only finances your education, but it can also save you income tax. Find out how to enjoy income tax benefits on your loan, the conditions that apply to the scheme, and the features you should know about.

Not many people applying for an education loan may be aware that they can actually get tax benefits on their loan. Under Section 80 E of the Income Tax Act of India, 1961, you can claim the interest on the education loan as a deduction.

There is a process that must be followed to claim your income tax benefits. Also, there are conditions that must be met by the loan product.

Conditions for the loan to be eligible for tax benefits

The first condition is that only loans from certain banks enjoy tax benefits. The only education loans that are eligible for tax deductions are those taken from:

In other words, the tax benefits will not apply to loans from other institutions. Some of the non-scheduled financial companies like Sundaram Finance, Muthoot Finance etc. also offer loans but these loans will not save you tax. Nor will non-scheduled state and urban cooperative banks like Delhi State Cooperative Bank, Bangalore's City-Cooperative Bank, Tamilnadu Industrial Co-op. Bank Ltd and others.

Other Features to Consider

Note that only the education loan interest (and not the principal) is eligible for tax savings. But there is no limit to the interest amount on which you can claim tax benefits. In other words, the entire amount of interest, irrespective of the size of the loan, is eligible for the scheme. Any rate of interest is valid for the benefit scheme.

Also, note that the relationship between the borrower/co-applicant with the student for whom financing is required will also factor into the scheme. Only applicants who are borrowing for the education of self, their spouse, children or ward can enjoy the tax benefits. Loans for the education of siblings or other relatives will not be eligible for the tax savings.

The benefits may also apply to loans for overseas education. However, they are only applicable for higher studies after class XII in an institute that is recognized by the central, state or local government.

Additionally, note that the deduction can only be claimed if the loan has been taken in the name of the applicant.

Earlier, the loan only covered courses in medicine, management and engineering as well as the pure sciences. But now it covers vocational studies as well. This means that studying vocational courses in fashion designing, baking and pastry making, courses in fitness and other short term courses will qualify for rebate under the Income Tax Act of 1961.

You can claim the deduction only when you begin to pay off the loan, and the duration of the tax savings lasts the duration of the repayment plan for up to 8 years. In other words, if you pay off the loan in six years, you will only enjoy tax benefits for that period of time. If you choose to pay interest during the moratorium or holiday period of the loan repayment (typically a year or six months after graduation) this gets included in the 8-year period.

So, if you have taken an education loan and are paying the interest on the loan, or are planning to take a loan, keep this benefit in mind. You will need to attach proof of the loan interest that you are repaying to the bank every month. Monthly loan repayment statements from the bank will need to be attached to your Income Tax Return for availing this rebate.

Article by Juana
Juana is a freelance writer, with years of experience, creating content for varied online portals. She holds a degree in English Literature and has worked as a teacher and as a soft skill trainer. An avid reader, she writes on a variety of topics ranging from health, travel, education and personality development.

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