Repayment of educational loan: deduction is limited
QUESTION: As a father I have availed myself of an educational loan amounting to Rs. 3 lakhs in favour of my son who is below 18 years of age for his studies in an Engineering College. As a taxpayer I would like to know whether I am eligible for any income-tax exemption by way of interest which I will be obliged to pay to the Bank.
ANSWER: Sec. 80E permits deduction in respect of repayment of loan taken for higher studies only to the person who pursues his own higher education. It is stated that the loan is taken by the reader in favour of his son. Even if the loan taken was on behalf of his son acting as guardian, relief is available under Sec. 80E, but only in the assessment of the son. Deduction is available in the initial year of repayment and seven succeeding years. The interest on such loan will also qualify for deduction but the limit for deduction will be Rs. 40,000 for any year. This limit was enhanced from Rs. 25,000 by Finance Act, 2000 with effect from April 1, 2001. This educational loan is available only for higher education by way of full time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics or statistics. Architecture, it has been clarified, would be treated as part of engineering studies in Circular No.688 dated August 23, 1994.
Many parents have expressed the view that the benefit of deduction should be extended to parents in order that it should be effective. But the law as at present does not permit the same.
Sec. 80F discontinued with effect from April 1, 1986 gave deduction to a parent or guardian for educational expenses of his ward, but it was only limited to non-citizen's expenses for purposes of education abroad.
Deduction for Indian students under Sec. 80E is available from assessment year 1995-96 with the following objective vide Circular No. 684 dated June 10, 1994, as under:
"Deduction in respect of repayment of loan taken as a student for pursuing higher studies"
36. Deserving, yet poor and needy, students often require loans from banks or other financial institutions or from charitable organisations for pursuing higher education. The repayment of such loans becomes a heavy charge on the person's resources.
36.2 With a view to sustaining high quality human resources in the country and to encourage talented young men and women to take up higher studies despite the constraints of resources, a new Sec. 80E has been inserted in the Income-tax Act to provide for relief to students taking loan for such studies. The relief is not allowed to the parent or guardian but to the student himself when he starts repaying the amount. Any repayment of the principal amount of loan taken for higher studies and interest thereon will be allowed as a deduction from the gross total income up to a maximum amount of Rs. 25,000 in a year.
The repayment can be in respect of loan taken from a financial institution or a charitable organisation which is approved for the purposes of Sec. 10(23C) or 80G(2)(a). This relief will be available for those who have undertaken graduate or post-graduate courses, in any branch of Engineering (including technology), Medicine or Management or post-graduate courses in any university in pure sciences or applied sciences including Mathematics or Statistics. It will not be available, for instance, for courses in Humanities, Social Sciences, Commerce, Accountancy or Law.
The first year in which the deduction will be available will be the year in which the person starts repaying the loan. The deduction will be allowed for a maximum period of eight years or till the principal amount of such loan together with interest are liquidated, whichever is earlier.
36.3 This amendment will take effect from April 1, 1995, and will, accordingly, apply to the assessment year 1995-96 and subsequent years".
The relief indicated above will benefit only very few persons marginally, hardly serving the professed objective of the provision.
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