After higher secondary school, quality education is becoming more and more expensive. Education loans are a popular choice for many students and parents who want to pay for their children’s further education at reputable institutions. Such loan products are also provided by many banks, financial institutions, and certain well-known trusts. Even though you have the means to pay for your ward’s higher education, you may want to consider an education loan if the cost is lower. However, you should base your choice entirely on your financial situation and investing plan.
In addition to paying for higher education, student loans allow the borrower who is repaying them to avoid paying taxes. By claiming it as a deduction, the interest portion of such loan repayments is tax-free. By deducting the interest portion of such loan repayment from gross income, tax is avoided on that portion. According to section 80E of the Income Tax Act, this deduction is available. It is not connected to any other investment or deduction that reduces taxes. No matter what other deductions are made, it may be claimed.
Who may make use of this deduction?
This deduction may be made by the student or his parent who repays the student loan. You can deduct this amount from your taxable income if you took out this loan while you were a student and are now repaying it.
You may deduct this amount as a parent if you took out a loan to pay for your children’s education and are now repaying it. You may also deduct this expense from a loan taken out to pay for the higher education of your spouse or a person over whom you have legal custody. Any other relative’s student debt cannot be deducted under this provision.
How long may I use this deduction?
Typically, EMIs are used to pay back student loan debt. This EMI’s only tax-deductible component is its interest portion. The first year of repayment is the year you begin making EMI payments on this loan. You have eight years, including the first, to deduct interest. This tax deduction is only valid for 8 years after that. You can only claim a deduction for a period of 5 years, not 8 years, if you repay your student debt in full within 5 years.
What kind of deductions can be made?
The amount of interest that was paid back in a given year may be deducted in the ITR that was submitted for that year. This deduction cannot be used to offset the cost of student loan principal repayment. The amount of the deduction claim has no upper restriction or limit. Assume that your gross annual salary is $10,000 and that you paid $200,000 in interest on a student loan during the year. This entire amount of interest can be claimed as a deduction for saving tax.
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