When you take a loan for higher studies, deduction is allowed under Section 80E for Interest that you pay towards this loan. Several forms of higher studies (including vocational courses) are covered under this section for claiming deduction. However, these courses must be pursued after completion of Senior Secondary Examination or its equivalent.
Here are a few conditions that you must satisfy to claim this deduction –
- You must be an Individual Tax Payer. This deduction is not allowed to an HUF or any other kind of tax payer
- This deduction is towards the Interest you pay on the loan taken
- The loan has been taken from a Financial Institution or a Approved Charitable Institution (not a relative or friend or any other person/entity)
- This loan is taken for higher education for you, your spouse or your children or for a student for whom you are a legal guardian
- The Interest is paid by you from your income which is chargeable to tax
What is the amount of deduction allowed and for how many years?
Interestingly, provided you fulfill the conditions laid out above, there is no limit on the amount of interest you can claim as deduction under this section. The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier. Therefore, this has to be claimed in 8 successive years by the tax payer or earlier when the interest is paid in full.
You can obtain a statement from the Institution which has provided you the loan to identify the interest payout for each year. Unfortunately no deduction is allowed towards Tuition Fees that you may incur or any amount towards the Principal Repayment of this loan – the deduction is only allowed towards the Interest that is paid on this Loan. However when you pay Tuition Fees towards full time education of your children, that expense can be included as part of deductions under Section 80C.
Your parents can claim a deduction when they take a loan for your education or you can claim a deduction when you take a loan for your own, your spouse’s or your children’s education. Since the period of deduction is limited to 8 years and there is no cap on the amount of deduction, it is prudent to wrap up your loan in 8 years and claim as much interest as possible, of course, when you are able to afford the outgo. Note that, the law does not specify whether this higher education has to be undertaken in India or outside India.
Go on then grab your next degree, while Section 80E and clearTax take care of your taxes.