Question: I am an individual taxpayer and intending to avail an education loan on behalf of my daughter who would be pursuing a course in an International Educational Institute abroad.
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Kindly guide on whether the interest paid on such educational loan taken for the purpose of daughter’s education can be claimed as tax deduction in my tax return. Further, whether such tax deduction would be restricted to education loan availed for Indian courses or extended to foreign courses as well?
Answer by Dr. Suresh Surana, Founder, RSM India: Interest on a loan taken from specified lenders (such as financial institutions like banks, etc. or any approved charitable institution) for pursuing higher education by the individual for himself or any of his relatives can be claimed as a tax deduction u/s 80E of the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act’). Such tax deduction can be claimed in respect of the initial assessment year and 7 assessment years immediately succeeding the initial assessment year or until the interest is paid in full, whichever is earlier.
For instance, in case the taxpayer has started paying interest from FY 2020-21 (i.e. AY 2021-22), the tax deduction can be claimed from FY 2020-21 (AY 2021-22) to FY 2028-29 (AY 2029-30) or in case the loan is fully repaid before FY 2028-29 (AY 2029-30), then deduction would be claimed until such period of expiry of loan. Herein, the taxpayer cannot claim the principal component of the loan EMI but only the interest component as tax deduction.
The individual can claim such tax deduction u/s 80E wherein such education loan is availed by him for his education or for the education of any of his relatives which would include spouse and children of that individual or the student for whom the individual is the legal guardian. It is pertinent to note that the educational loan availed from only specified lenders can be claimed as a tax deduction. Accordingly, an educational loan availed from any person (other than specified lenders) such as friends, family, etc. would not be eligible to claimed as a tax deduction u/s 80E of the IT Act.
Further, Section 80E requires that in order to claim tax deduction, the educational loan should be availed only for the purpose of Higher Education. Higher Education refers to 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.
Thus, the taxpayer can claim deduction of interest paid on educational loan for his daughter as children fall within the definition of relative defined u/s 80E.
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In the judgement of Pune Income-tax Appellate Tribunal, in case of Nitin Shantilal Muthiyan vs DCIT (2015) taxmann.com 416 (Pune) which has concluded that for claiming deduction under section 80E, there is no condition that higher education should be in India only.
