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Education Loan – Tax Benefits

By   /   December 28, 2012  /   2 Comments

 

education-loan pic

Students have different take on how to finance their higher education. It also depends on the financial condition of the family. Students pursuing Graduation mostly depend on their parents to finance whereas postgraduate students go for education loan because they are now mature enough & do not want to put any financial burden on their parents.

Best part of taking a Education loan is that one can claim income tax deduction on interest part u/s 80 E for the current assessment year if the following conditions are fulfilled:

  1. Person taking the loan must be an individual.
  2. He/She had taken a loan from any financial institution i.e. a banking company or notified financial institution. Loan taken from relatives & friends is not eligible for 80 E deduction.
  3. The loan was taken by the taxpayer for the purpose of pursuing his own higher education or higher education of relatives i.e. spouse,childrens, student for whom the taxpayer is a legal guardian.
  4. Loan is repaid in the previous year.
  5. Such amount is paid out of his income chargeable to tax.

All Interest amount is deductible when all the aforesaid conditions are satisfied.

 

Who is eligible for deduction:

The  person who took the loan is eligible for deduction on interest amount repaid u/s 80 E. In case father had taken the loan for child education, father can claim deduction, not son.

So it should be clearly mentioned in the loan form in whose name the loan is taken. This is one of the important step in the whole process. Factors such as tax bracket of parent, expected earning of the student & future liabilities of student & guardian should be kept in mind while taking the loan to avail maximum benefits u/s 80 E.

Student Eligibility:

  1. The student should be an Indian National
  2. Should have secured admission to a higher education course in recognized institution in India or Abroad through entrance test / Merit based selection process after completion of 10+2


Quantum Of Finance:

For studies in India: Max Rs. 10 lakh

For studies abroad: Max Rs. 20 lakh

( This amount may vary from bank to bank )

Security:

1. Upto 4 lakh Guardian(s) to be made joint borrowers. No security required.
2. > 4 lakh <= 7.5 lakh Guardian(s) as joint borrowers & Collateral security in the form of 3rd party . 3rd party may be friend or relative
3. > 7.5 lakh Guardian(s) as joint borrowers & Security such as land/bank fd’s etc.

 

Repayment Period:

Upto 7.5 lakh: 10 Years

> 7.5 lakh: upto 15 years

Expenses allowed:

  1. Fee payable to college / school .
  2. Hostel fee
  3. Exam fee / library fee etc.
  4. Books / uniform
  5. Travel expenses
  6. Purchase of computer
  7. Study tour / project cost & other cost related to completion of the course.

 

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Repayment holiday:

Course period  + one year or six months after getting the job, whichever is earlier.

Loan to more than one child:

Existence of an earlier education loan to the brother(s) or sister(s) will not effect the eligibility of another meritorious student.

Repayment of Loan:

Repayment of loan is expected to come from future earnings of the student after completion of education. Loan repayment is fixed by banks on EMI basis. EMI has two parts 1.) Interest 2.) Principal Amount. Tax deduction is given only on interest amount repaid.

Tax deduction is available for a maximum of 8 years:

So in order to get maximum benefit one should try to pay off the loan amount in 8 years as soon as the EMI start.

Emi will start a year from completion or 6 months after the borrower gets a job, whichever is earlier.

 

Rate Of Interest:

Simple interest to be charged during the study period & up to commencement of repayment i.e. commencement of EMI.

An example will help you understand how interest amount and EMI is calculated:

Ritu  took education loan of Rs. 10,00,000 @ 12% rate of interest for pursuing her MBA course of two years on April 2010. 1st Installment of Rs. 5,00,000 was withdrawn on April 2010 & 2nd on April 2011. Course completed on April 2012. EMI was started as soon as she got the job six months after completion of course i.e. from  September 2012. Final amount to be repaid by Ritu at the end of 2.5 years is as follows:

Loan amount in 1st year : Rs 5,00,000

Interest Amount in 1st year: 5,00,000*12% = Rs.60,000

Total loan amount in 2nd year = 10,00,000

Interest Amount in 2nd year: 10,00,000*12% = Rs. 1,20,000

Interest Amount for 3rd yr ( 6 months ) = (10,00,000*12%)/2 = Rs. 60,000

Total Amount to be repaid at the end of 2.5 yr’s is:

Loan Amount in 1st year 5,00,000
Interest Amount in 1st year     60,000
Loan Amount in 2nd year  5,00,000
Interest Amount in 2nd year ( Interest on Rs. 10 lakh )  1,20,000
Interest for last 6-m ( After completion of course )     60,000
Total Amount 12,40,000

 

Till now interest amount is not compounded i.e. Interest for 1st year is kept in a separate basket and interest on interest is not calculated in the 2nd year. Similarly interest for 2nd yr & last 6 months is not compounded.

Compounding will take place as soon as you start paying the EMI. Suppose Ritu decides to repay the total amount ( Rs.12,40,000) in 5 years in 5*12 = 60 equal installments. EMI for the same comes out to be Rs. 27,583.12 . Following table shows Maximum Deduction Ritu can avail by lowering her income up to the extent of Interest paid per annum.

There are seven columns in the table given below. Let me explain what each column means:

Month: Number of months in which loan will be repaid.

Opening Balance: Total loan amount in the beginning

Interest: Interest part of EMI. Interest @ 12%

EMI: Equated Monthly installment for 60 months ( EMI is always fixed , interest & principal component vary)

Principal: Principal part of EMI

Closing Balance: opening balance – principal

Max Deduction: Here maximum deduction on interest part which one can avail for each year is calculated by adding interest part of emi  for twelve months & is highlighted by green colour.

Month Opening Balance Interest EMI Principal Closing Balance Max Deduction

1

1240000

12400

27583

15183

1224817

2

1224817

12248

27583

15335

1209482

3

1209482

12095

27583

15488

1193994

4

1193994

11940

27583

15643

1178350

5

1178350

11784

27583

15800

1162551

6

1162551

11626

27583

15958

1146593

7

1146593

11466

27583

16117

1130476

8

1130476

11305

27583

16278

1114198

9

1114198

11142

27583

16441

1097757

10

1097757

10978

27583

16606

1081151

11

1081151

10812

27583

16772

1064379

12

1064379

10644

27583

16939

1047440

138437

13

1047440

10474

27583

17109

1030331

14

1030331

10303

27583

17280

1013052

15

1013052

10131

27583

17453

995599

16

995599

9956

27583

17627

977972

17

977972

9780

27583

17803

960168

18

960168

9602

27583

17981

942187

19

942187

9422

27583

18161

924026

20

924026

9240

27583

18343

905683

21

905683

9057

27583

18526

887157

22

887157

8872

27583

18712

868445

23

868445

8684

27583

18899

849546

24

849546

8495

27583

19088

830459

114016

25

830459

8305

27583

19279

811180

26

811180

8112

27583

19471

791709

27

791709

7917

27583

19666

772043

28

772043

7720

27583

19863

752180

29

752180

7522

27583

20061

732119

30

732119

7321

27583

20262

711857

31

711857

7119

27583

20465

691392

32

691392

6914

27583

20669

670723

33

670723

6707

27583

20876

649847

34

649847

6498

27583

21085

628763

35

628763

6288

27583

21295

607467

36

607467

6075

27583

21508

585959

86497

37

585959

5860

27583

21724

564235

38

564235

5642

27583

21941

542295

39

542295

5423

27583

22160

520134

40

520134

5201

27583

22382

497753

41

497753

4978

27583

22606

475147

42

475147

4751

27583

22832

452315

43

452315

4523

27583

23060

429255

44

429255

4293

27583

23291

405965

45

405965

4060

27583

23523

382441

46

382441

3824

27583

23759

358683

47

358683

3587

27583

23996

334686

48

334686

3347

27583

24236

310450

55489

49

310450

3105

27583

24479

285971

50

285971

2860

27583

24723

261248

51

261248

2612

27583

24971

236277

52

236277

2363

27583

25220

211057

53

211057

2111

27583

25473

185585

54

185585

1856

27583

25727

159857

55

159857

1599

27583

25985

133873

56

133873

1339

27583

26244

107628

57

107628

1076

27583

26507

81122

58

81122

811

27583

26772

54350

59

54350

543

27583

27040

27310

60

27310

273

27583

27310

0

20547

 

Maximum Deduction which Ritu can avail each year will be:

YEAR AMOUNT (Rs.)
1st  – After 12 months 1,38,437
2nd – After 24 months 1,14,016
3rd –  After 36 months 86,497
4th –  After 48 months 55,489
5th –  After 60 months 20,547

So in the 1st year , suppose Ritu Salary is Rs. five lakh, she has to pay tax on (5,00,000 – 1,38,437) = Rs.3 ,61,563 and so on.

Note: Sec 80 E deduction is available only on interest part of EMI & not on the Principal amount.

 

www.financialkundali.com

www.financialkundali.com

 

Insurance:

It’s better to take a term plan to the extent to which loan is availed. In case of demise of the person who took the loan, parents or the guardians or the 3rd party will not be liable to pay back the loan. The best part is, term plans are not so expensive.

Things to be kept in mind:

  1. Make sure that you had not taken education loan from more than one bank. Do inform the bank in case such situation arises.
  2. Take prior permission from institution and inform the bank in case you are working while pursuing the course.
  3. Bank is free to enquire about your progress report from the institution.
  4. Student need to retain all the bills such as books, travel etc & should produce in original when asked by bank authorities.

 

Prepayment of loan amount:

  1. There is no prepayment charges
  2. If the loan is repaid before the emi starts than firstly interest portion will be repaid. In the example interest for the 1st year is Rs.60,000. Suppose Ritu wants to prepay the loan upto Rs.50,000 before the emi starts, in this case interest amount upto Rs. 50,000 out of 1st year interest will be waived off 1st .

In case she wants to prepay Rs.1,00,000 after completion of 1st year, firstly Rs.60,000 will be deducted from interest of 1st year & then Rs.40,000 from principal amount.

Note: Since interest accumulated is not compounded, it’s better not to prepay the loan before the EMI starts.

Also interest rate upto 1% is slashed in case of prepayment of loan before the emi starts.

There are various things to be kept in mind before prepayment of education loan such as your tax bracket, interest rate of fixed income securities such as bank fd’s, interest rate at which loan is availed.

 

I tried my best to make things easy to understand. In case of any query please feel free to drop a message & share your experiences.

 

www.financialkundali.com

www.financialkundali.com

 

 

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About the author

Hi My name is Hari Om Tripathi. I am an engineer by chance & a Personal Financial Planner by choice. Currently residing in Kanpur & writing full time for Financial Kundali. In case you have any query about Personal Financial Planning such a buying a MF or ULIP, going for a life insurance plan or a term plan, to surrender your policy or not or any other questions related to your Personal Financial Planning, write to me at financialkundali@gmail.com

2 Comments

  1. […] 1. Education Loan – Tax Benefits […]

  2. Namita Tandon says:

    Sir, Thanks a lot. I was looking for such an article for long. I personally believe that taking loan for education is a smart step towards being focused towards your education.

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