May 04, 2012, 11.13 AM | Source: Moneycontrol.com
If you are considering taking an educational loan for the purpose of financing your study or that of some family member then it is necessary to ensure that a few simple points are kept in mind.
Arnav Pandya (more)
Financial Advisor & Writer, | Capital Expertise: Mutual Funds ,Fixed Income ,Tax
If you are considering taking an educational loan for the purpose of financing your study or that of some family member then it is necessary to ensure that a few simple points are kept in mind. This will help in ensuring that along with the financing benefits the requisite tax benefits are also available on this loan. Now loans are easily available and hence this also eases the overall effort but attention to some smaller points will be helpful.
Interest on loan
There are two components to the overall repayment of the loan and this will be the capital as well as the interest. When it comes to the question of tax benefits then this will be restricted to the interest amount that is repaid on the loan. The capital amount that is repaid will not get any benefit and hence this distinction becomes an important factor. The other point is that there is no limit of the amount that will be allowed as a deduction on the interest front and this is a significant point as there will not be any restriction that will hamper the amount of the loan that is taken as well as the kind of higher education that will be financed.
The next question is about the entity from which the loan will be taken and there has to be an approval from the income tax authorities on this front. This will be an important factor as it will be a condition that is quite basic to the overall requirement. Any financial institution that fulfils the definition would be covered under the benefit. The second thing is that even approved charitable institutions will be covered under this and hence this will be a factor that will increase the scope of the eligible borrowing entities. Banking institutions that are covered by the Banking Regulation Act will fall under the list of financial institutions and also other financial institutions notified by the central government.
There has to be a specific beneficiary of the education loan otherwise the benefit would not be available. Earlier the benefit was restricted only to the person who was paying the loan so in that case the person who was studying had to be the one who had to take the loan.
Now the conditions on this front have eased so it is possible to take a loan for the study of the relative and the tax benefit will be available to the person who has taken the loan. The definition of relative covers the spouse and the children of the individual and in case of a legal guardian the student for whom this role is played. This makes it clear that there can be some other family member for whom the borrowing can be undertaken and this will help in the planning of the loan.
The tax deduction can be taken for a period of eight years and this is a good enough time for the loan to come to be repaid. However if the loan comes to an end before the period of eight years is over then the benefit will be restricted to the time period that the loan was in operation and hence the benefit in this case will be for a lower time period.
The use of the loan should be for higher education which means any stage after passing the Senior Secondary level or its equivalent from any school, board or university recognised by the central government or by other authorities like the state government or local authority. This also clarifies the type of studies for which the benefit would be available.
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