Section 80E provides deduction in respect of interest on loan taken for higher education. The loan taken for higher education would include not only the expenses towards tuition fees for the course proposed to be undertaken but would also include expenses towards travel (applicable especially in case of courses outside India), expenses towards lodging and expenses towards study material and instruments like a laptop which may be mandatory for the course.
Who Can Claim The Deduction Under Section 80E
Deduction under this section can be claimed only by an individual who has taken a loan for higher education and paying interest on the same. It cannot claimed by an HUF, company or other type of tax payer. Till FY 2006-07, the deduction under this section was limited to loan taken by the assessee himself. However it was then modified to also apply to loans taken:
- For self
- Children of the assessee, including adopted children.
- For any student for whom the assessee is the legal guardian
Although, the loan can be availed for education of the individual or his relative, deduction can be claimed only by the individual who has availed the loan for this purpose and is responsible for repaying the same out of his income.
What expenses are allowed under Section 80E?
The deduction is allowed only in respect of interest paid on loan taken for higher education. No deduction is available in respect of repayment of principal portion of loan taken for higher education.
From whom can the loan be taken?
To claim deduction under section 80E, the assessee needs to avail loan from any financial institution or a recognised charitable institution. Deduction Section 80E cannot be availed towards the interest paid to a relative or employer towards a loan taken for higher education.
- Financial Institutions: Any institution to which Banking Regulation Act 1949 is applicable. It would thus, include banks and other banking companies. Financial institutions would also include institutions notified by the Central Government in its official gazette.
- Charitable Institutions: Loans for higher education can also be availed from any approved charitable institution. Approved charitable institution would mean an institution that has been established for any charitable purpose and approved by the relevant authority under the clause of 23C of Section 10. It would also include institutions referred to under Section 80G.
Charitable institutions would include any university or educational institution established solely for education purpose and being a non- profit organization. It would also include trusts or institutions established for charitable or religious purpose, provided they are approved by prescribed authority. At present, the prescribed authority is the commissioner of Income Tax (Exemptions) or Director General. The application for the approval of the prescribed authority need to be submitted by the trust or institutions in Form 56, as notified under Income Tax Rule 2C. Also, as mentioned above, it would also include charitable institutions covered under Section 80G – sub-section 2 (clause a).
What kind of education is covered under definition of ‘higher education’?
Section 80E provides for deduction in respect of loan taken for higher education. It may be noted that the section applies to ‘higher education’ and not on any loan taken for school admissions.
Higher education would mean the following:
- Courses taken up after completing Class 12 Examination like Senior Secondary or its equivalent.
- The university/board should be the one approved by local authority or the state or central government.
- The deduction under Section 80E can be availed only for full time courses. Loan taken for post graduate courses in medicine, management, engineering, applied science, etc. are covered under Section 80E. However, loan taken for part time courses are not included under Section 80E. But it covers vocational courses taken up after the completion of senior secondary examination.
- Overseas courses: Though the assessee should be a resident Indian and the loan should be availed from financial institution or charitable institution in India, the course for which the loan is taken may be undertaken in India or abroad. Thus, courses undertaken outside India also fall under the purview of the meaning of ‘higher education’, if taken up after completing senior secondary examination.
What is the amount of deduction that can be claimed under Section 80E?
The amount of deduction that can be claimed under Section 80E is equivalent to the amount of interest paid on loan taken on higher education. Thus, there is no upper limit for the deduction to be claimed. Deduction is available irrespective of the rate of interest that is charged on this loan. Also, the deduction under Section 80E can be availed irrespective of the amount of loan amount which can range from Rs. 1 lac to Rs. 20 lac or even more.
The deduction is available to the extent of interest paid on loan for higher education, in the financial year.
There is ‘no cap’ on the amount of interest that can be claimed as deduction.
The other conditions that need to be fulfilled are:
- The loan can be taken for higher education of either the assessee or spouse or children. However, the loan should be in the name of the assessee only. The assessee would thus be responsible towards payment of the interest and principal in respect of the loan.
- Amount should be paid towards interest on loan taken for higher education.
- The interest should be paid out of the income earned by the assessee during the financial year.
What is the duration for which deduction under Section 80E can be claimed?
The deduction under section 80E can be claimed from the year in which assessee starts paying interest on the loan for higher education. In tax terminology, the year in which the income is earned is called ‘Previous Year’ or PY and the year subsequent to it is called ‘Assessment Year’ or AY. In respect of section 80E, ‘initial assessment year’ is the assessment year for the previous year in which interest on loan for higher education is paid by the assessee. The deduction under Section 80E can be claimed from such ‘initial assessment year’ and 7 assessment years immediately succeeding the ‘initial assessment year’ or till such year that the assessee is paying interest on such loan taken for higher education, whichever is earlier.
Thus, if the assessee has taken a loan for higher education in the PY 2000-01 and has also started paying interest in the same year, then he can claim deduction for the payment of interest on such loan under section 80E from AY 2001-02. AY 2001-02 would be the ‘initial assessment year’ in this case. The assessee can thereafter claim deduction for the interest on loan for higher education for seven more years, i.e. till AY2008-09. However, if he has paid interest under this loan only for the initial 5 years (PY2000-01 to PY2004-05), then the deduction can be claimed only from AY2001-02 to AY2005-06.
The period for deduction is based on the general expectation that the course would be completed and the loan would be fairly repaid within 8 years.
Also, these kinds of loans generally come with a moratorium period that ranges from six months to one year after completion of the course. So, even if the loan is taken in say PY2000-01, repayment may begin only after end of moratorium period, which we may assume two years. So, in this case the repayment starts in PY2002-03 and the deduction towards interest paid on the loan can be first claimed in AY2003-04 and seven assessment years immediately succeeding AY2003-04.
How Section 80C differs from 80E
80C gives a deduction for payment of tuition fees at school, college and university level up to Rs 1.5 lakh per annum. However Section 80 E gives a deduction for education loan interest rather than tuition fees. Both the clauses are exclusive of each other.
Can 80E be claimed along with other sections?
Deduction under Section 80E is available over and above deductions available under other sections covered under Chapter VI A of the Income Tax Act. That is, even if the assessee has availed the maximum available deduction of Rs, 1,50,000/- under section 80C, he can still avail deduction under Section 80E. Thus, any assessee who is availing loan for higher education should avail the benefits of tax saving provided by Section 80E of the Income Tax Act 1961. The assessee would need to submit documents like a statement of loan segregating principal and interest paid on loan taken for higher education in the previous year, in case of scrutiny.
Section 80E limit for AY 2018-19 and for AY 2019-20:
This section is available in both AY 2018-19 and 2019-20 (PY 2017-18 and 2018-19).
Section 80E deduction limit
There is no upper limit on the deduction that can be claimed under Section 80E. The entire interest amount on your education loan is eligible for deduction, regardless of how much it is.
Section 80 E Calculator
Let’s assume that you have taken an education loan of Rs 10 lakh on which you are paying annual interest of Rs 1 lakh. Your gross total income is Rs 8 lakh. By taking advantage of the deduction under Section 80E, your taxable income will be Rs 7 lakh. Note that only interest and not principal is covered. Hence if you are replaying Rs 1 lakh in principal every year along with the interest, this amount will not be included for tax deduction. Typically your bank will give to the split between interest and principal within your Equal Monthly Installment (EMI).