Income Tax Act 1961 provides various nature of income which are exempted from tax like agricultural income, amount received under Public Provident Fund, dividends on equity shares or share of profit of a partner in partnership firm. These are incomes that are exempt under Section 10 of the Income Tax Act. These are, therefore, not chargeable to tax.
Further, there are also certain expenses incurred which are allowed as deduction from the income of the tax-payer. In case of partnership firms or corporate entities, any expenses which are incurred by the entity for the purpose of carrying out business are allowed as deduction.
Further, there are certain expenses incurred by individuals, corporates or Hindu Undivided Family (HUFs) which are permitted as deduction from the taxable income under the Income Tax Act 1961. Income Tax Act fine points to various nature of expenses incurred by tax payers which are permitted to be deducted from the gross total income of the tax payers, to arrive at the net taxable income of these tax-payers.
Chapter VI A of the Income tax Act details various such expenses and the deductible limits, which are permitted under the Income Tax Act. Section 80C to Section 80U of the Income Tax Act provides in details of such permissible deductions. It is, therefore, imperative to understand each and every deduction permissible under Chapter VI A of the Income Tax Act.
In this note, we intent to understand in detail the implication of Section 80E under chapter VI A of the Income Tax Act
Section 80E provides deduction in respect of interest on loan taken for higher education.
Section 80E was introduced to provide some relief to tax payers incurring high education expenses and need to avail loan for meeting such expenses. The higher cost of education prompted the introduction of this section.
The loan taken for higher education would include not only the expenses towards tuition fees for the course proposed to be undertaken but would also include expenses towards travel (applicable especially in case of courses outside India), expenses towards lodging and expenses towards study material and instruments like a laptop which may be mandatory for the course.
This means that that the deduction under this section is not available in case the loan is taken for higher education by any member of Hindu Undivided Family. Deduction under section 80E can neither be claimed by a corporate or a firm.
Section 80E has been introduced to encourage people undertaking higher education. Till PY 2006-07, the deduction under this section was limited to loan taken by the assessee himself. However, it is difficult for an individual undertaking a full time course to avail the loan benefit. The loans were primarily availed by the person on whom the individual is dependent, who are generally parents. The section was, thus, modified and it has been provided that the loan can be availed by the individual for undertaking higher education of the following people:
- For self
- Relative, being a spouse
- Relative, being children of the assessee. The loan can also be availed for an adopted child.
For any student for whom the assessee is the legal guardian
Any repayment of loan consists of two parts - the principal portion and the interest portion. In case of home loan availed by any assessee, the interest portion paid by the assessee is allowed as deduction under ‘income from house property’ while any repayment of principal amount is allowed as deduction under Section 80C of the Income Tax Act 1961. However, in case of loan taken for higher education, the Income Tax Act provides for deduction only in respect of interest paid on loan taken for higher education. No deduction is available in respect of repayment of principal portion of loan taken for higher education.
Here, it may be cleared that Section 80C provides for deduction in respect of tuition fees paid for education while Section 80E provides for deduction for the interest on loan taken for higher education. Both the clauses are exclusive of each other.
In earlier times, education expense needs were largely met with some financial assistance from family and friends. However, with time, the cost of education has increased and banks have commenced to provide loan for higher education.
To claim deduction under section 80E for payment of interest on loan for higher education, the assessee needs to avail loan from any financial institution or it could be any listed charitable institution. Section 80E clearly provides that the loan should be availed from financial institutions and charitable institutions. Deduction Section 80E cannot be availed towards the interest paid to a relative or employer towards loan taken for higher education
For the purpose of Section 80E, financial institutions and charitable institutions would mean the following:
- Financial Institutions: Any institution to which Banking Regulation Act 1949 is applicable. It would thus, include banks and other banking companies. Financial institutions would also include any such institutions notified by the Central Government in its official gazette.
Charitable Institutions: Loans for higher education can also be availed from any approved charitable institution. Approved charitable institution would mean an institution that has been established for any charitable purpose and approved by mentioned authority under the clause of 23C of Section 10. It would also include institutions referred to under Section 80G.
Charitable institutions would include any university or educational institution established solely for education purpose and being a non- profit organization. It would also include trusts or institutions established for charitable or religious purpose, provided they are approved by prescribed authority. At present, the prescribed authority is the commissioner of Income Tax (Exemptions) or Director General. The application for the approval of the prescribed authority need to be submitted by the trust or institutions in Form 56, as notified under Income Tax Rule 2C. Also, as mentioned above, it would also include charitable institutions covered under Section 80G – sub-section 2 (clause a).
Section 80E provides for deduction in respect of loan taken for higher education. It may be noted that the section applies to ‘higher education’ and not on any loan taken for school admissions.
Higher education would mean the following:
- Courses taken up after completing Class 12 Examination like Senior Secondary or its equivalent.
- The university/board should be the one approved by local authority or the state or central government.
- The deduction under Section 80E can be availed only for full time courses. Loan taken for post graduate courses in medicine, management, engineering, applied science, etc. are covered under Section 80E. However, loan taken for part time courses are not included under Section 80E. But it covers vocational courses taken up after the completion of senior secondary examination.
- Overseas courses: Here it may be noted that though the assessee should be a resident Indian and the loan is availed from financial institution or charitable institution is in India, the course for which the loan is taken may be undertaken in India or abroad. Thus, courses undertaken outside India also fall under the purview of the meaning of ‘higher education’, if taken up after completing senior secondary examination.
The amount of deduction that can be claimed under Section 80E is equivalent to the amount of interest paid on loan taken on higher education. Thus, there is no higher limit for the deduction to be claimed. Deduction is available irrespective of the rate of interest that is charged on this loan. Also, the deduction under Section 80E can be availed irrespective of the amount of loan amount which can range from Rs. 1 lac to Rs. 20 lac or even more.
The deduction is available to the extent of interest paid on loan for higher education, in the previous year. As we know, the previous year (PY) is the year beginning on April 01 and ending on March 31 and immediately preceding the assessment Year (AY). Assessment Year (AY) is the year immediately succeeding the previous year (PY).
There is ‘no cap’ on the amount of interest that can be claimed as deduction.
The other conditions that need to be fulfilled are:
- The loan can be taken for higher education of either the assessee or spouse or children. However, the loan should be in the name of the assessee only. The assessee would thus be responsible towards payment of the interest and principal in respect of the loan.
- Amount should be paid towards interest on loan taken for higher education.
- The interest should be paid out of the income earned by the assessee during the previous year.
The deduction under section 80E can be claimed from the year in which assessee starts paying interest on loan for higher education. In respect of section 80E, ‘initial assessment year’ is the assessment year for the previous year in which interest on loan for higher education is paid by the assessee. The deduction under Section 80E can be claimed from such ‘initial assessment year’ and seven assessment years immediately succeeding the ‘initial assessment year’ or till such year that the assessee is paying interest on such loan taken for higher education, whichever is earlier.
Thus, if the assessee has taken a loan for higher education in the PY 2000-01 and has also started paying interest in the same year, then he can claim deduction for the payment of interest on such loan under section 80E from AY 2001-02. AY 2001-02 would be the ‘initial assessment year’ in this case. The assessee can thereafter claim deduction for the interest on loan for higher education for seven more years, i.e. till AY2008-09. However, if he has paid interest under this loan only for the initial 5 years (PY2000-01 to PY2004-05), then the deduction can be claimed only from AY2001-02 to AY2005-06.
The period for deduction is based on the general expectation that the course would be completed and the loan would be fairly repaid within 8 years.
Also, these kinds of loans generally come with a moratorium period that ranges from six months to one year after completion of the course. So, even if the loan is taken in say PY2000-01, repayment may begin only after end of moratorium period, which we may assume two years. So, in this case the repayment starts in PY2002-03 and the deduction towards interest paid on the loan can be first claimed in AY2003-04 and seven assessment years immediately succeeding AY2003-04.
Deduction under Section 80E is available over and above deductions available under other sections covered under Chapter VI A of the Income Tax Act. That is, even if the assessee has availed the maximum available deduction of Rs, 1,50,000/- under section 80C, he can still avail deduction under Section 80E.
Thus, any assessee who is availing loan for higher education should avail the benefits of tax saving provided by Section 80E of the Income Tax Act 1961. To avail deduction the assessee needs to submit such documents like a statement of loan segregating principal and interest paid on loan taken for higher education in the previous year.