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Three things to know before claiming tax benefit on education loan repayments

The advantage of an education loan is that if the parent doesn’t have money, the loan can be repaid after the child completes the course and gets a job. (Photo: iStock)

NEW DELHI: Education loans come in handy while planning an academic future, and are a viable alternative to dipping into savings.

“What makes education loans particularly attractive is that unlike home loans or personal loans, education loans come with a moratorium that’s 6-12 months longer than the duration of the course for which you have taken the loan. During the moratorium, the bank expects no Equated Monthly Instalment comes (EMIs) or repayments. This means you have ample time to complete your education and start working before you start repaying your loan,” said Adhil Shetty, CEO, Bankbazaar.com.

Tax benefits on education loans also make them attractive. You can claim tax deductions against education loans under Section 80E of the Income Tax Act. However, a few things must be kept in mind before claiming benefits.

First, while there is no upper limit on the amount you can claim, you can claim tax benefits only on the interest paid on education loan and not on the principal.

Second, only the person who avails the loan can claim deductions. So, if you take an education loan for your daughter and repay it, you can claim the tax deduction. But if your daughter repays the loan with her own income, neither you nor she can claim deductions. This is because the loan is in your name, but the repayment is not made out of your taxable income.

Third, not all education loans are eligible for tax exemptions. “Section 80E specifies that only loans from specified financial institutions, including banks and “any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf” are eligible for exemptions. So, if you plan to take a loan from a Non-Banking Financial Institution (NBFC), you need to ensure that your loan provider is included in this list,” said Shetty.

Summing up, an education loan allows you the finances and flexibility to take up higher education and pay for it systematically over a longer period. At the same time, it gives you tax breaks that make repayments less expensive.

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