Home Income tax Section 80E of Income Tax Act, 1961

Section 80E of Income Tax Act, 1961

October 20, 2024

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This article is written by Smaranika Sen. This article generally talks regarding the tax exemptions, which one can claim on educational loans, with reference to Section 80E of the Income Tax Act, 1961. It further describes the eligibility criteria, significance, benefits, and limitations of this section.

Table of Contents

Introduction

A tax is a kind of a mandatory charge that is levied by the government upon the individuals. It is a charge which is paid by the individuals on their income. Such charges can be imposed on multiple things as well, or buying anything, or as per one’s income, etc. In India, tax plays a huge role which eventually shapes up the economy. The main purpose of the tax is to aid the government and generate revenue for them. Such revenue is used by the government to finance their activities for the public at large.

Out of various taxes like corporate tax, entry tax, excise duty tax, service tax, etc. Income tax is one of the essential taxes which are levied upon individuals by the government depending upon their income. Income tax is governed in India under the Income Tax Act, 1961. This Act covers various provisions regarding different schemes of income tax, tax deductions based upon the criteria and income slabs, etc.

Section 80E of the Act holds a particular significance related to higher education. Section 80E of the Income Tax Act serves as a tax exemption for individuals who want to pursue higher education. This section enables individuals to claim deductions on the interest paid on their outstanding loan amount which they had taken in order to pursue education. This is a step to eventually decrease the financial burden to some extent on the individual or families. Through this article, we will exhaustively discuss Section 80E of the Income Tax Act.

Education loan

An education loan is a kind of loan that aids monetary support to students to pursue their education. It is especially taken by students who are unable to meet the fees structures of their respective courses. The loan not only covers the fees of the courses but also any kind of hostel facilities, book costs and other related expenses. Education loans can be financed by any private bank or such competent authority or the government.

Purpose of educational loan

Education loans are generally taken to cover the expenses of an individual. It is extremely helpful for such individuals who are unable to bear the high cost of education. Therefore, with the help of this education loan, individuals can gain a quality education or can study in their desired college or school without having any financial constraints.

From where can we take education loans

Education loans can be taken from any kind of financial institution be it governmental or private, charitable institutions etc. However, one thing has to keep in mind that, in order to avail educational loan deduction under Section 80E of the Income Tax Act, the educational loans should be taken only from financial institutions, or charitable institutions as mentioned in Section 80E. Any educational loans taken from friends, relatives, or private parties will not permit an individual for educational loan deduction.

What is meant by education loan deduction

Education loan deduction is a kind of tax exemption for such people who avail the education loans. Such tax deduction is governed by Section 80E of the Income Tax Act, 1961. It has to be kept in mind that the tax exemption is upon the interest and not on the principal amount of the outstanding loan. Interest is the surplus amount which the borrower pays to the lender for using the actual amount of money borrowed and the principal amount denotes the actual amount of money borrowed.The education loan deduction is only for a time period of eight years which commences from the year of repayment of the loan.Such education loan deduction stops once the individual has fully repaid the interest amount.

Eligibility for education loan

Generally, individuals can claim educational loans from private or government or other related authorities as per the terms of their contract. However, the general eligibility criteria for education loans are as follows:

The person claiming an education loan should be an ‘individual’. An individual is not clearly defined under the Income Tax Act. However, on minute observation we can state that under Section 2(31) of the Income Tax Act, the term ‘person’ has been defined, and from there we can clearly see that the term ‘individual’ does not mean a Hindu Undivided Family, or a company, or a firm, or an association, or a local authority, or any artificial juridical persons. Therefore, only an ‘individual’ can claim an education loan.
The education loan should be claimed for only higher educational purposes or higher education for one’s relatives and not for any personal purposes. Higher education, generally, signifies education after clearing Secondary Board Examinations. Claiming of educational loan can be done by oneself, parents, spouse, or any legal guardian.

What is the limit of availing educational loan

Educational loans are beneficial in various ways. Various banks offer educational loans which can vary from Rs. 1 lakh to even Rs. 1 crore. In the Indian educational system, educational loans can be given by banks approximately up to Rs 50 lakh, and in the case of giving loans by Indian banks for education outside India, the loan can be sanctioned up to Rs 1 crore. There are even some financial institutions which also provide 100% financing for education. The most vital part of an education loan is that it covers not only the tuition fees but also other related expenses. Educational loans are also very easily available and can be sanctioned without many obstacles.

Analysis of Section 80E of Income Tax Act, 1961

Section 80E states the information regarding the tax deduction criteria on the interest for educational loans. The Section is divided into three sub-sections, the first two talk about the process and another sub-section describes some terminologies that have been used in the other two sub-sections of Section 80E.

According to Section 80E(1), the total income of an individual assessee is computed and from such computation, the amount of income which is chargeable to tax. Such tax shall have a deduction by way of interest only on the educational loans taken by such an individual from any financial institution or any approved charitable institution. Such deduction can be availed only if it is used for solely educational purposes or for the purpose of higher education of relatives.

Section 80E(2) states that the period for claiming this deduction, shall be computed from the initial assessment year and succeeding seven more assessment years or until the interest as per sub-section (1) is paid to the individual assessee in full or whichever is earlier between these two criteria.

Section 80E(3) defines some of the important terminologies which have been used in the above two sub-sections. The terminologies are:

‘Approved charitable institution’- As per this Section, approved charitable institution means any institution which has been established solely for the purpose of charity and such is approved by any prescribed authority as mentioned under Section 10(23C), or any kind of institution as defined under Section 80G(2)(a).
‘Financial institution’- This term signifies any kind of bank or financial institution that is under the Banking Regulation Act 1949. This term also includes any kind of bank or banking institution which has been mentioned under Section 51 of the Banking Regulation Act, 1949. Further, this term also includes any kind of financial institution which is under the control of the Central Government or which has been notified by the central government in the official gazette.
‘Higher Education’- This term means any kind of course which is generally pursued after passing the higher secondary examination or any examination that is equivalent to that from any school, Board or University which is recognised by the state government, the Central Government or local authority or any other competent authority.
‘Initial assessment year’- This term means the year in which the assessee had started paying the interest on the loan in the year relevant to the previous year. The assessment year begins on 1st of April and ends on 31st of March. For example, an individual paying taxes for the year 2022-2023 financial year has to take the assessment year 2023-2024.
‘Relative’ – Here the term ‘relative’ is used in relation to an individual which means the spouse or the children or any student of whom the individual is the legal guardian.

What is the eligibility criteria for deduction under Section 80E

There are certain eligibility criterias which have to be followed in order to claim a deduction under Section 80E. Such criterias are:

The deduction on the educational loan can be claimed only on the interest part of the educational loan and not on the principal amount.
Only taxpayers who have taken educational loans are eligible for claiming deductions on educational loans.
Only those individuals will be able to claim educational loans who have taken such loans from any recognised financial institution or any approved charitable organisation. However, if any individual has taken educational loans from any relative or friends or from any private bodies that are not recognised under Section 80E will not be able to get any deduction.
Educational loans must be taken only for the purposes of higher education, that is any kind of education after completion of higher secondary.
The deduction is only available to the taxpayer only for the initial eight years. The time period of those eight years begins from the year the repayment of the educational loan starts.
This deduction will be available only for those who have opted for the old tax regime. The new tax regime does not allow deductions as mentioned in the Budget 2023.

Limits of exemption under Section 80E of Income Tax Act, 1961

There is no such exemption limit under Section 80E. Whatever an individual has paid as interest in a financial year can be claimed as a deduction irrespective of the actual amount that has been taken on a loan. The procedure for deduction of the interest component from the educational loan from the total income of an individual assessee is similar to deductions under Sections 80C and 80D.

As already stated above, the deduction allowed under Section 80E is only upon the interest part of the EMI, which is paid during the financial year. However, one needs to obtain a certificate from the bank, which will segregate the principal and the interest portion of the educational loan paid by the individual assessee during the financial year.

Time period for deduction under Section 80E

Under Section 80E(2), we observe the time period for claiming deduction under this Section is 8 years or until the interest is paid, whichever is earlier. Thus, we can say that the deduction starts from the year from which the individual starts repaying the loan or until that individual has fully repaid the interest, or any of which is earlier. Therefore, if complete payment of the loan has been done in 4 years the tax deduction will be allowed for 4 years only and not for 8 years.

If any individual crosses the time period of 8 years, i.e., such individuals are unable to repay the loan within such period, then after the completion of the 8th year, such individuals will be barred from claiming deduction on educational loans.

Early repayment of educational loans : advantages and disadvantages

In general circumstances, educational loan repayment should start either after 12 months from the completion of the course or after 6 months from engaging in employment. However, this time period may differ from one bank to another bank.

Now some students may repay their educational loans before the stipulated time given from their respective bank. The advantage in such a case is that the burden of repayment of such a massive amount may be reduced. However, certain banks charge a penalty on prepayment of educational loans. If the penalty amount along with the principal and interest surpasses the EMI amount which was originally stipulated by the bank, then it would not be beneficial to the candidate. While early repayment of loan may be an advantage, it might become a disadvantage as the individual will also not be able to claim the deduction under Section 80E as deduction under the said provision can only be claimed upon the interest part and not upon the principal or penalty.

Significance of Section 80E of Income Tax Act, 1961

The most crucial feature of Section 80E of the Income Tax Act 1961 is that it helps the student to some extent from enduring extreme financial burdens and also helps their families by enabling deduction on the amount of interest of the educational loans. This is especially significant for those individuals who come from economically weaker classes of the society as with these deductions their burden of repaying the loan becomes quite easier. Students from every economic background can claim for this deduction.

Thus, we can observe that this provision is for all and does not differentiate between individuals. Therefore, there is no such discrimination or ambiguity in this provision which can create confusion among those claimants. Even educational loans taken for educational institutions situated outside India are eligible for claiming deductions.

Case laws

In the order in the case of Nitin Shantilal Muthiyan vs. DCIT (2015), it was observed that the taxpayer’s son was pursuing a higher education course from George Washington University USA. When the taxpayer claimed for deduction under Section 80E of the Income Tax Act, the assessing officer did not permit for the deduction, as the child of the taxpayer was studying outside India. The taxpayer had put forward his contention by stating that the provision of Section 80E does not explicitly deal with higher education within the territory of India.

However, on the rejection of his contention by the assessing officer and Commission of Income Tax (Appeal), the taxpayer went to the Tribunal. The Tribunal, on much observation, held that educational loans which are claimed for higher education under Section 80E in foreign are also eligible for deductions. The interpretation of Section 80E does not bar any person from deductions who is pursuing higher education abroad.

In another case of Shri Yogendra Khandelwal, Jaipur vs. Acit, Jaipur (2018), the assessee made a commission payment of Rs. 8,04,234, to Smt. Pushpa Khandelwal who was the proprietor of M/s. Steel Corporation of India, Jaipur. On careful observation of the assessing officer especially in reference to Section 40A(2)(b), as Smt. Pushpa was a covered person, the commission payment was not permitted as the assessee could not provide sufficient reasons for paying commission to that business. The assessing officer had also disallowed the deduction of the assessee under Section 80E. It was not allowed on the grounds that the loan was taken under the joint name of the assessee and his relative and also the loan was not repaid then.

However, being dissatisfied with such non-allowance, the assessee appealed before the Income Tax Commissioner, wherein the ACIT also upheld the decision of the assessing officer and dismissed the appeal. However, regarding the deduction under Section 80E, the ACIT had allowed deduction as under Section 80E deductions can be claimed even for loans taken for relatives and also the repayment had the loan started since that year.

However, regarding this allowance of deduction, there was an appeal that such cannot be claimed as it was under a joint name. On much observation, the Court held that the assessee could claim deductions under Section 80E, even if it’s under the joint name of him and his relative, except if the same loan deductions have not been claimed by his relative.

Conclusion

It is always appreciated if equal opportunities are given to all without any discrimination. Even under the Constitution of India, we observe that equality is our fundamental right. Section 80E also ensures that there is equality, as it does not discriminate between any sections of the society. It states that deductions on the interest of educational loans can be claimed by all individuals, without discrimination. By offering such a tax exemption, the government is also ensuring that the youth of the nation and any other person who wants to pursue higher studies can do so without much monetary baggage. Thus, Section 80E plays a pivotal role in encouraging students to pursue higher education.

Frequently Asked Questions (FAQs)

Is the deduction claimed on the whole amount of the educational loan?

No, the deduction can be claimed only on the interest part of the educational loan as per Section 80E.

Are Section 80C and Section 80E inter-related?

Section 80C states regarding the deduction of tax with respect to the tuition fees which are paid for education purposes. On the other hand, Section 80E states regarding the deduction in respect of the interest on the educational loans which are especially taken for higher education. Thus, both these provisions are not interrelated and they should not be read together. They are absolutely exclusive to each other.

What are the essential documents which are required for applying for educational loans?

The documents which are required in order to apply for educational loans are:

The application form is to be filled out by the student or any other person. The application form is available on the website of any financial institution or any approved charitable institution which provides educational loans.
Passport-size photographs.
Residential or permanent address.
Educational certificate and marksheet of Higher Secondary Education or any undergraduate course.
Proof of the admission letter of the university.
Income proof and details of the parent or legal guardian.

What are the essential documents which are required for claiming deductions on the interest of educational loans under Section 80E?

The essential documents are:

A loan sanction receipt or document
Repayment statement which is to be obtained from such a financial institution or charitable institution against which the loan is sanctioned.
A certificate has to be provided by the individual which has to be taken from the financial institution from which the individual has obtained an educational loan. The certificate must clearly mention the principal amount and the interest amount.

Is deduction allowed in case the educational loan is taken for an institution established outside India?

Yes, deductions are allowed even if the educational institution is situated outside the territory of India. For example, if an individual has taken a loan to study any higher education course in any foreign university. In that case, the taxpayer against whose name such loan is availed can claim deductions under Section 80E.

References

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Section 80E of Income Tax Act, 1961

Introduction