Deduction 80E: Interest on Education Loan Section 80E (A.Y.2023-24/2024-25)

Deduction 80E – Interest on Education Loan Section 80E: Getting a higher degree can really boost your knowledge and job prospects, but it’s no secret it can be pretty pricey. To help with that, there are some tax rules in place to lighten the load and keep encouraging us to learn more.

One of the significant relief measures is the deduction on interest paid on educational loans (Deduction 80E), available to individual assessees who have borrowed from financial or approved charitable institutions.

The deduction 80E aims to lighten the financial load for individuals pursuing higher education, or those facilitating the higher education of their relatives – spouses, children, or legally-guarded students. This income tax deduction offers substantial tax relief without setting a cap on the amount of interest that can be deducted from the assessee’s taxable income. However, deduction 80E, which is exclusive to the interest portion and not the principal, has a conditional time frame. The benefits of income tax deduction can be availed for a maximum period of eight years, starting from the year the interest payment on the loan begins or until the interest is fully paid, whichever happens, earlier.

What is 80E Section for Income Tax Deduction?

Section 80E of the Income Tax Act, 1961, in India, provides provisions for tax deductions on the interest paid on education loans.

1. The Deduction Applicability: The deduction under Section 80E is applicable only for the interest paid on the loan taken for higher education. The principal amount does not qualify for this deduction.

2. Loan for Self or Relatives: The loan can be taken for the taxpayer, spouse, children, or for a student to whom the taxpayer is a legal guardian.

3. Higher Education: The term ‘higher education’ here includes any course pursued after passing the Senior Secondary Examination or its equivalent from any school, board, or university recognized by the government.

4. Duration of Deduction: The tax deduction can be claimed for a maximum of 8 years, starting from the year in which the individual starts repaying the loan, or until the interest is paid in full, whichever is earlier.

5. No Limit on the Amount: There is no upper limit on the amount of interest that can be claimed as a deduction under Section 80E. This makes the provision particularly beneficial for higher education loans, which often come with significant interest.

Remember, to claim this deduction, the loan must be taken from a financial institution or an approved charitable institution. Loans from friends or relatives do not qualify for the deduction under Section 80E.

According to tax laws, an individual assessee who has procured a loan from any financial institution or approved charitable institution, to fund their own or their relative’s higher education, is eligible for a tax deduction. The term ‘higher education’ refers to any course of study pursued after passing the Senior Secondary Examination or its equivalent from a government-recognized school, board, or university.

Who is Eligible to Get Deduction Under Section 80E?

As per section 80E,  the loan must have been taken out by the individual claiming the deduction. In other words, the person claiming the deduction should be the one legally obligated to repay the loan. The loan should be for the higher education of the individual, their spouse, their children, or a student for whom they are a legal guardian.

The loan should be taken from a financial institution or an approved charitable institution. Informal loans, like those from friends or family, do not qualify for this deduction.

The loan should have been taken for the purpose of pursuing higher education. As per the Income Tax Act, higher education refers to any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board, or university recognized by the Indian government or any local or foreign government.

Understanding ‘Relative’ Under Section 80E

As per Section 80E of the Income Tax Act in India, the term ‘relative’ refers to specific family members for whom an individual assessee can take out an education loan and claim a deduction on the interest paid.

As per Section 80E, a relative is defined as:

1. The spouse of the individual assessee.
2. The children of the individual assessee.
3. Any student for whom the individual assessee is the legal guardian.

This means if an individual assessee takes an education loan for the higher education of their spouse, children, or a student for whom they are the legal guardian, they are eligible to claim a deduction on the interest paid on that loan.

Purpose of an Education Loan for Tax Deduction under Section 80E

The purpose of your education loan, especially in the context of claiming tax benefits under Section 80E of the Income Tax Act in India, should be to finance higher education.

The loan could be taken for the higher education of the individual who has taken the loan, their spouse, their children, or any student for whom they are the legal guardian. It is essential that the loan is used for paying tuition fees, purchasing books or other educational materials, or covering any other expenses directly related to the course of study.

It’s important to note that these education loans should be taken from a financial institution or an approved charitable institution to be eligible for the tax deduction under Section 80E. Loans from non-institutional entities like friends or relatives are not eligible for this tax benefit.

Max Amount of Deduction Available

The unique feature of the Income Tax Act’s deduction 80E is that there is no upper limit on the amount of interest that can be deducted. An individual who has taken an education loan can claim a deduction on the entire amount of interest paid on the loan from their taxable income.

However, this deduction is only applicable to the interest part of the loan, not the principal amount. Furthermore, this benefit can be availed for a maximum period of eight years, starting from the year in which the repayment of the loan starts, or until the interest is fully paid, whichever happens earlier.

Example: 

Sure, let’s consider an example to clarify how the unlimited amount of deduction and the time limit work under Section 80E:

Mr. Gupta has taken an education loan of INR 40 lakhs for his son’s medical studies in a government-recognized institution. The loan carries an interest rate of 12% per annum, and the repayment starts in the Financial Year (FY) 2023-24.

In FY 2023-24, the total interest amount that Mr. Gupta pays is INR 4.8 lakhs (12% of 40 lakhs). Under Section 80E, he can claim this entire amount of INR 4.8 lakhs as a deduction from his taxable income for the year, significantly reducing his tax liability. This deduction is possible because Section 80E doesn’t cap the amount of interest that can be deducted.f

In the subsequent years, he continues to pay interest and claim the full amount as a deduction under Section 80E. However, the benefit can be availed for a maximum period of eight years, i.e., until FY 2030-31, starting from the year when he began repaying the loan.

Suppose by FY 2029-30, Mr. Gupta has managed to pay off the entire interest on the loan. Although the eight-year period technically extends till FY 2030-31, the deductions would cease in FY 2029-30 as he’s no longer paying interest on the loan.

So, Mr. Gupta benefits from the uncapped deduction under Section 80E, but it’s important to remember that this applies only to the interest portion of the loan, not the principal amount.

Income Tax Deductions 80C to 80U AY 2023-24

Conditions to Claim Deduction 80E

To avail of the tax benefit under the deduction 80E of the Income Tax Act in India, which pertains to interest paid on education loans, an individual needs to meet the following eligibility requirements:

1. Applicant Eligibility: If you’re looking to benefit from the tax deduction under Section 80E, you should be the one who officially took out the education loan.

2. Beneficiary Eligibility: The deduction under Section 80E is applicable when the education loan has been taken for higher studies of the individual borrower, their spouse, their children, or a student for whom the borrower acts as a legal guardian.

3. Lender Eligibility: The loan availed for the purpose of claiming the benefit under deduction 80E should be from a recognized financial institution or an approved charitable institution. Informal loans from friends or relatives are not eligible.

4. Loan Purpose: To avail of deduction 80E, the education loan must be used for higher education, which is defined as any course pursued after passing the Senior Secondary Examination or its equivalent from any school, board, or university recognized by the government.

5. Repayment Period: The benefit under deduction 80E can be claimed for a period of eight years starting from the year the individual begins repaying the loan, or until the interest is fully paid, whichever comes first.

6. Interest Deduction: Deduction 80E applies only to the interest portion of the education loan EMI and not the principal amount.

Timeframe for Deduction 80E

A critical aspect of Deduction 80E is the period for which this deduction can be claimed. As per the act, an individual can claim this tax benefit for a maximum of eight years. This period commences from the year in which the repayment of the loan begins.

However, it’s important to note that if the interest on the loan is paid off in full before the completion of these eight years, then the deductions will stop at that point. Therefore, the duration for claiming Deduction 80E is either eight years from the start of the repayment or until the interest is fully paid, whichever comes first.

Example 

Sure, let’s consider an example to illustrate how Deduction 80E works:

Suppose Mr. Sharma, an IT professional, takes an education loan of INR 10 lakhs at an interest rate of 10% per annum for his daughter’s post-graduate program in a government-recognized university. The repayment of the loan begins in the Financial Year (FY) 2023-24.

The interest portion of his Equated Monthly Installment (EMI) for the FY 2023-24 amounts to INR 1 lakh. Mr. Sharma can claim this entire amount as a deduction from his taxable income for that year under Section 80E.

Assuming Mr. Sharma continues to repay the loan over the subsequent years, he can claim the interest portion of his EMIs as a deduction under Section 80E for a maximum of eight years, i.e., until FY 2030-31, provided he is still paying interest on the loan.

However, if Mr. Sharma manages to pay off the entire interest on the loan by FY 2026-27, he would only be able to claim the deduction until that financial year. Even though the eight-year period would technically allow him to claim the deduction until FY 2030-31, because the interest is fully paid off earlier, the deductions would cease after FY 2026-27.

Remember, Deduction 80E only applies to the interest portion of the loan, not the principal amount.