Recently in India people are travelling abroad for higher education like MBA or masters in computer science and everyone cannot afford such huge fees and they generally take loans for funding their education and wonder if such payment of interest is tax deductible or not and if it is then upto what limit.
Section 80E talks about such interest on education loan where the bare act reads as under:
“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.
(2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest referred to in sub-section (1) is paid by the assessee in full, whichever is earlier.
(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 pre-vious 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.”
Thus, the important points from above section is as follows:
Deduction is available only to individuals.
Loan can be taken for his own higher education or for higher education of his/ her spouse, children or for anyone for whom he is a guardian. Thus loan for any education from recognised school, institution or university after 12th standard is eligible for deduction.
The amount of deduction would be interest on such education loan and there is no limit of such deduction.
The amount of deduction is allowed on payment basis. It starts from the year in which one starts paying loan and is available for next 7 consecutive assessment year.
Loan must be taken from Financial institution or charitable institution prescribed under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G. Thus loan taken from foreign banks is not eligible for deduction.
This deduction has nothing to do with 1.5 lakh deduction available under Section 80C.
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