How can you make the most of tax deductions on a student loan?

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Section 80E specifies that only loans from specified financial institutions, including banks and other financial institutions notified by the central government, are eligible for exemptions.

With a student loan you have the finances and flexibility to pursue higher education and pay systematically over a longer period of time. At the same time, it gives you tax benefits that make the refund cheaper. However, there are some caveats to using these benefits. Understand the tax exemptions available with the education loan and how best to use them.

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You can claim tax deductions for student loans under Section 80E of the Income Tax Act. However, there are a few things to keep in mind about tax deductions on education loans.

The first point is that while there is no cap on the amount you can claim, you can only claim tax breaks on the interest paid on the student loan and not on the principal.

Second, only the person using the loan can claim deduction. Student loans do not have to be taken out by the student himself. You can take out a loan for your children or your spouse. So: β€œIf you take out a student loan for your daughter and repay it, you can claim the tax deduction. However, if your daughter repays the loan from her source of income after she starts earning herself, neither you nor she can claim any deductions. This is because the loan is in your name, but your taxable income is not repaid. Simply put, if the borrower wants to claim tax relief, he has to make sure that the EMIs disappear from their accounts,” said Adhil Shetty, CEO of BankBazaar.com.

Keep in mind that some institutions allow you to take out a student loan to fund your sibling’s or cousins’ higher education. However, unless you are their legal guardian, you cannot claim any tax deductions on the loan.

Third, not all education loans qualify for tax exemptions. β€œSection 80E specifies that only loans from specified financial institutions, including banks and other financial institutions notified by the central government, are eligible for exemptions. While most of the leading NBFCs are on this list, if you intend to take out a loan from an NBFC, make sure your lender is on this list. Money borrowed from family, friends or employers does not fall under the category of student loans and is not subject to exemptions,” Shetty said.

You can deduct the interest for a maximum of 8 years from the year in which you start to repay the loan. If the term of your loan is longer than 8 years, you cannot claim a deduction for the interest paid after 8 years.

Conclusion

So it is clear that interest paid on student loans obtained to pursue higher studies in India or abroad can be claimed as a deduction from the individual’s taxable income. β€œThe deduction can be claimed from the year the interest payment begins and ends with the loan repayment or the 8th year, whichever is earlier. Please note that these loans may only be provided by banks/financial institutions/approved charities. Interest paid for this on loans from friends and family is not eligible for such a deduction. A certificate from the institution would be required to support the amount of interest paid to claim a deduction,” said Aarti Raote, Partner, Deloitte India.

It may also be noted that loans to yourself or spouse, children and legal departments are allowed for this purpose. Higher education is also defined as a study pursued after passing the upper secondary examination or its equivalent from a government accredited school, board or university.

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