Why Education Loan Borrowers Deserve Better Tax Benefits this Union Budget

Education is an investment towards one's career development and a necessity to lead a successful life. It is an investment that benefits not only the student but also the country's economy as it leads the path towards health, employment, and empowerment. However, with the rising inflation, education has become expensive in India as well as overseas. For a minority of people, it could be an easy choice to shift money from some of their investments. But, most of us cannot afford to pursue higher education without availing of an education loan.

When people think of inflation, the first thing that comes to their mind is the increase in the prices of vegetables, fruits, and fuel. The effects of educational inflation are not faced immediately by the students/parents; hence, they are taken lightly. However, education inflation can disrupt the students' dreams of pursuing higher education and achieving their career ambitions. We all have witnessed how despite the Covid-19 pandemic in 2021, all the units of the Indian Institute of Technology (IIT) doubled their fees for all the undergraduate courses across the country.

Taking into account the importance of higher education and the high cost of education worldwide, the Government allowed tax deductions under Section 80E of the Income Tax Act 1961. However, considering the rapidly rising cost of education and the surge in the education loan interest rates over the last few years, education loan borrowers deserve better tax benefits in the upcoming Union Budget 2023-24.

Many borrowers have this misconception that tax deduction provisions available on education loans are similar to the tax deduction provisions available on home loans. While home loans qualify for the tax deduction of both; principal and interest repayment under Section 80C and 24b, respectively, education loan qualifies only for interest repayment under Section 80E of the Income Tax Act. Meaning you can only claim a tax deduction for the interest component of the education loan EMIs paid in a financial year and cannot claim for the principal component of the EMIs paid.

The good part of this tax deduction provision is that there is no upper limit on claiming a tax deduction on education loan interest payments. So, one can claim the entire interest paid in a financial year for a tax deduction. Some financial experts believe that the lack of tax exemption for the principal repayment of an education loan gets compensated by the absence of a maximum tax deduction limit on the interest payment.

Given the high education loan interest rates, while we can agree that the tax deduction provision for the interest component is advantageous, we cannot completely neglect the zero provision on the principal component. Quality education in India can cost anywhere from Rs 5 Lakhs to 30 Lakhs, whereas studying abroad can cost a minimum of Rs 25 Lakhs and can go up to 1 Cr or even more! This amount is huge for a common taxpayer.

Similar to a home, education is a basic need and investment towards a better future for a person and the economy as a whole. In order to make quality education accessible to those who do not have their own financial resources and recognising the high cost of education, Finance Minister Ms Nirmala Sitharaman needs to make provision for claiming a tax deduction on the principal component repayment of education loans.

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There is a long-pending demand from home loan borrowers to provide separate tax deduction limits for the home loan principal amount repayment, which needs to be addressed in the upcoming Budget. The Government needs to provide a separate deduction limit for home loan principal repayment, increase the deduction limit under Section 80C, and accommodate the tax deduction limit for the education loan principal repayment under Section 80C.

As you might know, depending on the loan amount, an education loan tenure can go up to 15 years. However, the prevailing period of availing tax benefits under Section 80E is capped at 8 years. So, the borrowers can claim the tax deduction for the education loan interest component for up to 8 years. For instance, if you availed of a large amount of education loan and completed the education loan repayment in, say 15 years, you can claim a tax deduction for the interest paid within 8 years of the commencement of your repayment period and not for the remaining 7 years.

Suppose you opt for an education loan of Rs 25 Lakhs at the rate of interest of 9% p.a. and repay the entire loan amount in 13 years. Your education loan EMI will be Rs 27,242, and your yearly repayment will look like this:

So, in this example, while you will be able to claim the tax benefit for the first 8 years, you cannot claim the remaining interest paid for the last 5 years, which totals up to Rs 3,22,183. Depending upon the loan amount and the loan tenure, this amount can make a significant difference to a common middle-class man. To give the much-needed boost to education and encourage weaker sections of the economy to pursue higher education through an education loan, the Government should consider increasing the tax deduction eligible loan tenure up to 15 years.

Furthermore, a taxpayer can claim for tax deduction under Section 80E for an education loan taken for pursuing higher education for self, spouse, children, or for a student for whom he/she is a legal guardian. However, they do not qualify for tax benefits for the loan taken for one's sibling or other relatives.

Besides, tax deductions can only be claimed by the borrower in whose name the loan is taken. So, if a parent has taken the education loan for his/her child, only he/she is eligible to claim the deduction. The student (child) cannot claim the deduction even if he/she starts working and repaying the loan after completing the studies. However, if the student is a joint borrower, he/she can take advantage of the tax benefit under Section 80E of the Income Tax Act. Finance Minister Ms Nirmala Sitharaman needs to relook at and revive these conditions in the Budget 2023.

All in all, in order to promote education in all sections of the economy, Finance Minister Ms Nirmala Sitharaman, in the upcoming Union Budget to be presented on February 1, 2023, under the Modi Government, needs to prioritise the education sector and focus on promoting education loans through better tax deductions. Inclusion of tax deduction for the principal repayment of an education loan under Section 80C and increasing the tax deduction eligible loan tenure up to 15 years will encourage opting for education loans to those who do not have the means to finance their higher education, thus leading to an educated and empowered country.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.