Understanding Tax Benefits on Education Loans: Key Insights

Navigating Education Loans and Tax Deductions

Education loans have become a popular option for financing higher education, both domestically and internationally. To alleviate the financial strain on families, the Income Tax Act offers tax deductions on education loans under Section 80E. However, many taxpayers are uncertain about whether they can claim these benefits if the loan is sourced from friends or family instead of traditional banks or financial institutions.

Clarifying Tax Queries

A pertinent question was raised by Suraj Sharma from Noida, who intends to borrow money from friends to support his son's higher education. While he plans to pay interest on this loan, he is primarily concerned about the possibility of claiming a tax deduction for the interest paid when filing his income tax return. Tax expert and chartered accountant Balwant Jain provided clarity on this matter.

Insights from Section 80E of the Income Tax Act

Section 80E permits taxpayers to deduct the interest paid on education loans. This deduction applies to loans taken for the higher education of oneself, a spouse, or children, and can also extend to students for whom the taxpayer is a legal guardian.

The deduction is available for a maximum of eight consecutive years, commencing from the financial year when interest repayment begins. If the loan interest is fully repaid before the eight-year period concludes, the deduction ceases in that year.

Importantly, there is no cap on the amount of interest that can be claimed as a deduction; taxpayers can claim the actual interest paid during the financial year.

Interest vs. Principal Deductions

A crucial stipulation under Section 80E is that only the interest component of the education loan qualifies for a tax deduction. The principal repayment does not qualify for any tax benefits.

This distinction sets education loans apart from home loans, where taxpayers can claim deductions on both principal and interest payments under various sections of the Income Tax Act.

Eligibility Criteria for Education Loans

Many taxpayers mistakenly believe that any loan qualifies for deductions. According to Balwant Jain, deductions under Section 80E are only applicable if the education loan is sourced from recognized financial institutions or approved charitable organizations.

Eligible sources include:

• Banks


• Non-banking financial companies (NBFCs)


• Approved charitable or philanthropic institutions

Loans taken from friends, relatives, or private individuals do not qualify for deductions under Section 80E, regardless of whether interest payments are made regularly or documented properly.

Old Tax Regime Requirement

Another significant condition is that the tax deduction under Section 80E is only available under the old income tax regime. Taxpayers opting for the new tax regime cannot claim this deduction.

Thus, before securing an education loan or planning repayments, taxpayers should assess whether the old tax regime is more advantageous for their overall tax situation.

Joint Education Loans

In cases where an education loan is taken jointly, the deduction must also be claimed jointly. Each co-borrower can claim a deduction proportional to the interest they have paid, provided all other conditions under Section 80E are met.

Conclusion for Suraj Sharma

In Suraj Sharma's situation, since he plans to borrow from friends, he will not be eligible for a tax deduction on the interest paid under Section 80E. Despite the loan being for his son's education and interest payments being made, the source of the loan does not meet the eligibility criteria outlined in the Income Tax Act.

Key Takeaways for Taxpayers

For those aiming to benefit from tax deductions on education loan interest, it is crucial to borrow from banks, NBFCs, or approved charitable institutions. While loans from friends or relatives may offer convenience, they do not provide any tax advantages under Section 80E.

Taxpayers should carefully weigh both funding options and tax implications before finalizing an education loan, and consider consulting a certified tax professional for informed decision-making.