Can tax benefits be claimed on an education loan taken from friends?

Tax rules for education loans

• Tax deduction on education loans applies only if from a bank or approved institution.
• No deduction under Section 80E for loans taken from friends or relatives
• Only interest paid is deductible, not principal repayment

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Many parents borrow informally from friends or relatives to fund their child’s higher education, assuming the tax benefits will still apply. Today's Ask Wallet Wise query decodes whether the Income Tax Act allows deductions on such education loans.

If I take an education loan for my son from my friends and pay interest to them, can I claim a deduction for the interest and repayment of the education loan in my ITR? 

Expert's Advice: Section 80E of the Income Tax Act allows an individual to claim a deduction for interest paid on an education loan taken for the higher education of the taxpayer, his or her spouse, or children. The deduction is available for eight consecutive years, starting from the year in which the interest payment begins. It can be claimed only in the year in which the interest is actually paid and not on an accrual basis.

The deduction under Section 80E is available only for interest paid on the education loan. No deduction is allowed for repayment of the principal amount, unlike a home loan, where deductions are available for both interest and principal repayment.

Further, the deduction under Section 80E can be claimed only if the loan is taken from a financial institution or an approved charitable institution. Unlike home loans, where deductions are allowed even if the loan is taken from friends or relatives, education loans taken from friends do not qualify for this benefit.

Since you intend to take the education loan from your friends, no deduction is available under Section 80E. Also, this deduction is available only under the old tax regime. In case of a joint education loan, the deduction can be claimed by all joint borrowers, such as parents or a spouse, who are co-borrowers on the loan.

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