Deduction of Interest on Loan taken for Higher Education

Deduction of Interest on loan taken for Higher education is probably very less known benefit provided by Income Tax Department. Now a days cost of higher education is soaring . Students take loan with an intention to pay once that start doing job . Government has provided incentive by way of deduction Under Section 80E of Income Tax Act,1961. You will get good idea of this deduction at the end of the post .

Understanding Provision of Section 80E:

(1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, any amount paid by him in the previous year, out of his income chargeable to tax, by way of interest on loan taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education or for the purpose of higher education of his relative.

Elements of Sections 80E:

While going through Provision , we can list down following points for better understanding:

1. Interest on Loan is allowable as deduction and not principal amount of loan
2. Said interest should have been paid in previous year out of his or her taxable income
3. Loan should be taken from any financial or any approved charitable institution for higher education
4. Deduction U/S 80E can be allowed for assessee or to his/her relative for higher education
5. Furthermore as per Sub-Section 2 of 80E , deduction is allowed in initial year and seven years immediately succeeding the initial assessment year or interest paid in full , whichever is earlier

Meaning of various terms:

It is especially relevant to understand meaning of financial and approved charitable institution, higher education ,initial assessment year and relative therefore Section 80E has provided meaning of these terms .

(3) For the purposes of this section,—

(a)  “approved charitable institution” means an institution specified in, or, as the case may be, an institution established for charitable purposes and approved by the prescribed authority under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G;

(b)  “financial institution” means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf;

(c)  “higher education” means 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 authority authorised by the Central Government or State Government or local authority to do so;

(d)  “initial assessment year” means the assessment year relevant to the previous year, in which the assessee starts paying the interest on the loan;

(e)  “relative”, in relation to an individual, means the spouse and children of that individual or the student for whom the individual is the legal guardian.

In conclusion,hope you have now better clarity regarding Deduction of Interest on Loan taken for Higher Education. If you have paid interest and if it is eligible deduction as per conditions mentioned above , you can claim this deduction in your return of income .