Section 80E of the Income Tax Act

Section 80E of the Income Tax Act of 1961 offers taxpayers the benefit of claiming a deduction for the interest paid on loans taken for higher education. This provision is designed to alleviate the financial burden of education loans, encouraging individuals to pursue higher education.

The deduction under Section 80E is available only under the old regime. It is applicable for interest paid on a loan taken for the higher education of the taxpayer, their children, spouse or if he acts as a the legal guardian of the students.

Nature of the Loan: The loan should be taken from a financial institution or any approved charitable institution. Loans from relatives or friends do not qualify for this deduction.

Purpose of the Loan: The loan must be taken to pursue higher education. This includes vocational courses and studies pursued after passing the Senior Secondary Examination or its equivalent from any school, board, or university recognised by the central government or state government, local authority, or any other educational authority authorised by the government to do so.

Eligible Individuals: This deduction can be claimed by individuals on the interest paid on the loan for themselves, their spouse, children, or a student for whom they are the legal guardian while filing returns under the old regime.

The deduction permitted is for the entire interest amount paid on EMIs throughout the financial year. There is no limit to interest deduction under section 80E. of Income Tax.

While there's no 80E maximum limit for deduction amounts, individuals must obtain a certificate from their bank. This certificate should clearly state the interest and principal amounts of the education loan for that particular financial year.

Example of section 80E deduction limit:

Let’s assume that an assesee has applied for a loan 6 years back of the principal amount ₹ 10 lakhs. He pays 6% interest on the loan amount every year with the monthly payment. He wants to take a deduction for the same while filing an income tax return under the old regime for the assessment year 2024-2025.

The calculation for net taxable income after deduction under section 80E:

Deduction under section 80E is available for a specified period, typically starting from the year in which the individual begins repaying the loan until the loan is fully repaid or for a maximum of eight consecutive years, whichever comes earlier.

It allows individuals to reduce their taxable income by the amount of interest paid on qualifying education loans yearly while filing tax returns.

Loan Agreement or Sanction Letter

A copy of the loan agreement or the sanction letter from the financial institution or approved charitable institution from where the education loan was obtained. This document should clearly state the terms and conditions of the loan, including the amount sanctioned, the interest rate, tenure, and the purpose of the loan.

Interest Certificate from the Lender

An interest certificate from the lending institution is crucial. This certificate must detail the amount of interest paid during the financial year on the education loan. The certificate should segregate the principal and interest components of the payments made during the year.

Proof of Payment

Receipts or statements that serve as proof of payment of the interest on the education loan during the relevant financial year, like bank statements, are necessary. These documents should correspond with the information in the interest certificate provided by the lender.

Details of the Educational Course and Institution

Documentation that provides details about the higher education course for which the loan has been taken. It should include the name and duration of the course and the name and address of the institution, whether it is in India or abroad. For example, admission letters, course brochures, fee receipts, or any other relevant documents.

PAN Details

The Permanent Account Number (PAN) of the borrower is required for verification and processing of the deduction claim under Section 80E.

Step 1: Ensure Eligibility

First, confirm that the loan has been taken from a financial institution or an approved charitable institution specifically for higher education. The loan should be in your name, and the interest repayment period for claiming the deduction is limited to 8 years, starting from the year in which you begin repaying the interest.

Step 2: Collect Necessary Documents

Gather all required documents, including the loan agreement or sanction letter, interest certificates from the lender for the relevant financial year, bank statements showcasing interest payments, and any other proof of interest payments. These documents serve as evidence of the interest paid on the education loan.

Step 3: Calculate the Interest Amount

Determine the total amount of interest paid during the financial year. This will be the amount eligible for deduction under Section 80E. Remember, only the interest portion of the repayment is deductible, not the principal amount.

Step 4: File Your Income Tax Return

When filing your Income Tax Return (ITR), include the interest amount paid on the education loan as a deduction under Section 80E. This section is designated explicitly for deductions related to education loan interest payments in the ITR form.

Additional Points to Consider

No Cap on Deduction: There is no maximum limit on the interest amount that can be claimed under Section 80E.

Deduction Period: The deduction is applicable for a maximum period of 8 years or until the interest is completely repaid, whichever is earlier.

Deduction Applicability: The deduction under Section 80E is applicable only to the interest portion of the loan repayment. The principal repayment is not eligible for any tax deduction.

Apart from Section 80E, which focuses on the deduction for the interest paid on loans taken for higher education, section 80D of the Income Tax Act focuses on the deductions allowed on premiums paid by the taxpayer on medical insurance.

A maximum deduction of ₹50,000 per year is permitted for senior citizens, or ₹25,000 per year for the average individual is allowed.

Buying health insurance is the saviour for taxes as well as financial security during medical emergencies. To assist with that, Tata AIG provides you with the facility of cashless insurance. However, one needs to understand the terms and conditions of the policy and coverage while they buy health insurance online or offline.

Section 80E of the Income Tax Act serves as a significant support mechanism for individuals by providing tax relief on interest payments for higher education loans. By offering this deduction, the government acknowledges the financial challenges associated with higher education and aims to make it more accessible to students and their families.

Additionally, individuals should ensure timely repayment of their education loans to maximise the potential tax savings under Section 80E.