Tax Benefits on Education Loan to Study Abroad

Studying abroad has become a dream for many students due to the excellent quality of education, diverse opportunities, and exposure to different cultures. Whether it is pursuing a bachelor’s, master’s, or diploma program, international universities offer a plethora of courses in various fields. However, financing higher education overseas can be a challenge.

This is where education loans come to the rescue. Not only do they cover tuition fees and other related expenses, but they also come with added benefits, like tax savings under Section 80E of the Income Tax Act, 1961. Let us dive into how tax benefits on education loan to study abroad make it more appealing for students.

Tax Benefits on Overseas Education Loans

Tax benefits refer to the relief provided by the government to reduce your tax liability if you meet specific eligibility criteria. These benefits often come in the form of deductions or credits. For education loans, Section 80E of the Income Tax Act provides a significant advantage, allowing borrowers to deduct the interest paid on the loan from their taxable income.

Section 80E of the Income Tax Act, 1961

Under Section 80E, the interest paid on an education loan in India for study abroad qualifies for a tax deduction. This applies to loans taken for higher education, including overseas studies. Importantly, both the borrower (the student) and the co-applicant (usually a parent or guardian) are eligible to claim this deduction. This provision reduces the overall cost of the loan and makes pursuing international education more affordable.

Eligibility Criteria to Claim Tax Benefits

Here are the key points to remember if you are planning to claim tax benefits:

1. Only the interest component of the education loan is eligible for a deduction, not the principal amount.
2. The deduction can be claimed by either the borrower or the co-borrower, depending on who is repaying the loan.
3. The benefit can be availed for a maximum of 8 years or until the interest is fully repaid, whichever is earlier.
4. Loans must be taken from a financial institution approved by the government. Loans from unapproved lenders or informal sources are not eligible for these benefits.

Financial Institutions Offering Tax Benefits

Most leading banks, both public and private, offer education loans eligible for tax benefits. Examples include State Bank of India, Bank of Baroda, HDFC Bank, Axis Bank, and ICICI Bank. Non-Banking Financial Companies (NBFCs) also provide education loans, but only those notified by the government as eligible financial institutions can offer tax benefits.

How to Claim the Deduction?

To get the tax deduction and the lowest interest rate on education loan, borrowers need to obtain an interest certificate from the lending institution, which details the interest paid during the financial year. This certificate is essential when filing income tax returns.

Tax Collection at Source (TCS) on Foreign Remittance – Budget 2024 Update

The 2024 Union Budget introduced significant changes to the TCS rates for foreign remittances, including those for education. If you are self-funding your education abroad, TCS is applicable at 5% for remittances above ₹7 lakhs. In contrast, students taking an education loan for the same purpose benefit from a significantly lower TCS rate of 0.5%.

Additional Costs to Consider

While education loans offer significant savings, it is essential to factor in other costs. For instance, a nominal GST of 0.18% is applied on foreign remittance transactions. Additionally, service providers may charge processing fees. However, these costs are minor compared to the savings from lower TCS rates and tax deductions on loan interest.

Why Education Loans Are a Smart Choice?

Beyond the tax benefits and lower TCS rates, education loans offer flexibility in repayment terms and ease the financial burden on families. They also help students build a credit history, which can be beneficial for future financial needs.

In summary, education loans are not just a tool to fund your dream of studying abroad; they also come with significant financial perks. The tax benefits under Section 80E, combined with the lower TCS rates introduced in the 2024 budget, make loans an economically smarter choice compared to self-funding.

So, if you are planning to pursue higher education overseas, consider the long-term savings and financial advantages of opting for an education loan. It is a step toward a brighter future without undue financial strain!