Mukesh Patel.in
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TAX INCENTIVES FOR HIGHER EDUCATION

Eight Years Deduction for Interest on Loan for Higher Education, without any Monetary Ceiling

Section 80E provides for deduction in respect of any amount paid by an individual (without any monetary ceiling) by way of interest on loan taken from any bank or notified financial institution or an approved charitable institution for the purpose of pursuing his higher education or the higher education of his relatives viz. his spouse or his child or even in respect of a student for whom the individual is the legal guardian.

This deduction is allowed for a maximum period of eight years starting from the year in which the taxpayer starts paying interest or until the interest payable on such loan stands paid in full, whichever is earlier.

The meaning of Higher Education for purposes of Section 80E, which was earlier restricted to include “full time studies, being any graduation or post-graduation course in engineering, medicine, management or any post-graduation course in applied sciences or pure sciences including mathematics and statistics,” has been widened with effect from FY 2009-10 viz. Assessment Year 2010-11, to cover “any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central Government or State Government or local authority or by any other authorized authority.”

For availing the benefit of this deduction, it is also necessary to ensure that the payment of interest is made by the taxpayer out of his income chargeable to tax.

DEDUCTION AVAILABLE TO STUDENT, PARENT, GUARDIAN OR SPOUSE

Until Assessment Year 2007-08, this deduction was available only in the hands of the individual student, who had taken the loan for pursuing his higher education and not in the case of his parent or guardian or spouse, who may be making the payment of interest on such loan.

Thus the benefit of this relief allowed only to the student and not to his parents, legal guardian or spouse, mostly proved to be academic, since the student who was eligible did not have the taxable income so as to avail any meaningful tax break and the parent, guardian or spouse who could really enjoy tax saving in his income bracket was not permitted to do so. This was a major demand in budget memorandums for several years, which finally came to be heeded to in Budget, 2007, with effect from Assessment Year 2008-09.

Case Study: Tejasvi Abhyankar of Ahmedabad is keen to send his son for MBA to the US. He takes a bank loan of Rs.40,00,000 repayable at 12% interest per annum, to fund the higher education of his son.  Since Tejasvi earns income in the maximum tax bracket of 30.9%, he will be able to save tax of Rs.1,48,320 on the interest of Rs.4,80,000 paid by him on the loan taken for his son’s education and allowed as a deduction from his gross total income. As mentioned hereinabove, there is no monetary ceiling in respect of the amount of interest eligible for deduction under Section 80E.

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