Education Loan Offers Great Benefits to Those in the 30% Tax Bracket
Like the various deductions available for computing the taxable income, there is a deduction under Section 80E for the interest paid on loans taken for higher education where such interest is payable out of the taxable income. Here, higher education has been defined to mean full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate courses in applied sciences or pure sciences, including mathematics and statistics. Also, it has been specifically clarified that architecture will fall under the engineering category.
POINTS TO NOTE
Firstly, the studies can be anywhere in the world and not necessarily in India.
Secondly, the education loan taken can cover not only tuition or college fees alone, but also other incidental expenses like hostel charges, book costs, etc.
Thirdly, the deduction is available only for loan taken from financial institutes (ie, Indian banking companies and other notified institutes like HDFC) and approved charitable institutes. Thus loans from family, relatives and employers are not covered.
Finally, the deduction is available for a period of up to 8 consecutive years, beginning from the year in which the interest is paid on the loan.
Given that full deduction of the interest cost is available, for a person paying taxes in the 30% bracket, this means that the effective interest cost on the loan is reduced by 30%. The good news is that the Direct Taxes Code (DTC, the proposed new income-tax law from April 2012 onward) proposes to continue this benefit. Under DTC, higher education has been more liberally defined to cover any course of study pursued after passing the senior secondary examination and covering loans taken for education of students for whom an individual is a legal guardian as well.
