Section 80E

Section 80E provides deduction regarding the interest on loan taken for higher education. A loan taken for higher education would include not only expenses towards tuition fees for the course proposed to be undertaken but would also include expenses towards travel, lodging, and towards the study material and making use of instruments like a laptop which may be mandatory for the course.

Who all can claim deduction under Section 80E?

Under this Section, the deduction can be claimed only by an individual who has taken a loan for higher education and paying interest on the same. HUF, Company or another type of taxpayer cannot make a claim. Till FY 2006-07, the deduction under this section was limited to the loan taken by the assessee himself. However, it was then modified to also apply to loans taken:

• For self
• Spouse
• 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 the education of the individual or his relative, the 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 covered under Section 80E?

The deduction is allowed for interest paid on loan taken for higher education. No deduction is available in respect of repayment of the principal portion of the loan taken for higher education.

From whom can the loan be taken?

To claim deduction under Section 80E, assessee needs to apply loan from any financial institution or a recognized Charitable institution. Deduction under Section 80E cannot be availed towards the interest paid to a relative or employer towards a loan taken for higher education.

Financial institution 

Any institution on which the Banking Regulation Act 1949 is applicable. It includes banks and other banking companies. Financial institutions would also include institutions notified by the Central Government in its official gazette.

Charitable Institutions: 

Higher Education loans can also be availed from any approved charitable institution. Approved charitable institutions 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 educational purposes and is a non- profit organization. It would also include Trust or institutions established for charitable or religious purposes, provided they are approved by the 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 needs to be submitted by the trust or institutions in Form 56, as notified under Income Tax Rule 2C. Also, as mentioned above, it would include charitable institutions covered under Section 80G – sub-section 2 (clause a).

What kind of education is covered under ‘Higher Education’?

Higher Education covers 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 the local authority or the state or central government.
• The deduction under Section 80E can be availed only for full-time courses. Loan taken for postgraduate courses in medicine, management, engineering, applied science, etc. are covered under Section 80E. 
• To claim a deduction in overseas courses, the assessee should be a resident of India and loans should be availed from a financial institution of the charitable institution in India. The course for which loan is availed can 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.
• However, a 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.

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 the 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:

• One can avail of a loan for higher education of either assessee or spouse or children. But loan should be in assessee’s name only. The assessee thus 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 Section 80E can be claimed?

The deduction under Section 80E can be claimed from the year in which assessee is paying interest on the loan for higher education taken. In terms of ‘tax’, the year in which income is earned is known as ‘previous year’ and year after it is called ‘Assessment Year’. Under Section 80E, ‘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.

If the assessee has taken a loan for higher education in the previous education and started paying interest in the same year, then he or she can claim deduction on interest payment under Section 80E from assessment year.

For 7 more years, assesses can claim a deduction regarding the interest paid on the loan taken for higher education.

The deduction period is based on the general expectation that the course would be completed, and the loan repayment would be completed within 8 years. These loans come with a moratorium period which ranges from 06 months to 1 year after the course is being completed.

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 clauses are exclusive of each other.

Can 80 E be claimed along with other sections?

Deductions made under Section 80E are available over and above deductions available under other sections which are part of Chapter VIA of the Income Tax Act. If the assessee avails the benefits of the tax-saving provided by Section 80E of the Income Tax Act 1961, he or she needs 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 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 set 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 80E Calculator

Let’s assume that you have taken an education loan of Rs 10 lakh on which you are paying an 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: 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).