The finer points of the deduction on educational loans

There are tax benefits available to an individual on an education loan but while the overall benefits are simple there are a lot of details that need to be understood while actually claiming the benefit. It should not be that the individual is denied the benefit due to some technical point or some smaller condition not being fulfilled. The overall benefit is that there is a deduction for interest paid on education loan. There is no ceiling on the interest benefit though the principal repayment does not qualify for the tax benefit. Here is a look at the other details that will help the individual to get the tax benefit.

Individual taking the benefit

The first thing is that the benefit of the education loan interest deduction is available only to an individual and not some other entity. Often the education loan in India is taken by an HUF or some other entity but in this case the tax benefit will not be available as only an individual can make use of its benefit. The other point is that the loan should be taken for the pursuit of studies by the individual and his family. This will include the individual plus the spouse and children. Also the children for whom the individual is a legal guardian would be covered under the conditions.

Income chargeable to tax

There is an important condition with respect to the repayment of the loan for the deduction to be available. This is that the amount has to be repaid from the income chargeable to tax. In simple words this means that the individual cannot repay the amount from some tax free receipts and claim the benefit. It has to be paid out the income that is taxable. This is a tricky detail because often there could be a situation wherein some lump sum that is not taxable is used for the repayment in which case the amount can be disallowed. This is one area where some care has to be taken.

 Entity from whom taken

There is also a condition with respect to the entity from whom an education loan will be eligible for a deduction. This has to be taken from a financial institution or an approved charitable institution. This will cover all the banks and other big financial institutions and also the charities that are registered with the Income Tax Department so the choice is quite wide on this front. This however excludes friends and relatives from whom often a loan is taken as the amount of interest paid to them would not be covered for the deduction. The individual can take a loan from them but the tax benefit would not be available so this needs to be considered.

Higher studies

It is also not that any kind of course or study would be covered for the purpose of the education loan for ensuring that the tax benefit is present. This has to be higher studies which is defines as a course after the completion of Senior Secondary Education or its equivalent from any school , board or university that is recognized by the central government, state government or local authority. This definition is quite wide and it will include most of the professional and other post graduate courses for which a lot of people take loans. Once these detailed conditions are known then the individual can ensure that they are able to plan and take the loan properly that will give them comfort as well as convenience.

[Source: http://www.moneycontrol.com/news/tax/the-finer-pointsthe-deductioneducational-loans_4784581.html]