The Implication of Interest on Education

Loan

Student loans in India, popularly known as Education loans, have become a popular method of funding

higher education in India with the cost of educational degrees going higher. The spread of self-financing

institutions for higher education in fields of engineering, medical and management which has higher

fees than their government aided counterparts have encouraged the trend in India. Most large public

sector and private sector banks offer educational loan.

When it comes to all the building blocks that form a complete and successful life, nothing is as important

as quality education. However, education in India, at least the commonly perceived ‘quality education’

as imparted by acclaimed and influential educational institutions, is decidedly costly and not easily

available to everyone- especially those who deserve it based on merit alone. Thus, education loans are

vitally important. A barebones explanation for an education loan is thus, ‘funds offered by financial

institutions to meritorious and/or deserving students so that the latter can pursue their basic/higher

education, in India or abroad’. Almost all banks in India offer education loans, and the demand for it has

remained stable with the Indian student community.

Benefits of Education Loan:

When it comes to a complete education loan, the following conveniences are offered as part of the

education loan-

Anyone with a will to study can apply.

Education loans are provided to pursue all types of academic courses, in India and abroad. The courses

include graduation, post-graduation, vocational courses and other certificate courses.

Loan amounts can vary from a minimum of Rs. 10 lakhs to a maximum of Rs. 15 lakhs. For education

abroad, banks provide loans to the quantum of Rs. 20 lakhs.

The applicant’s annual family income and the course pursued are primary determinants for the

applicable loan amount.

Usually, female students are offered discounts and/or lower interest rates when it comes to education

loans.

Government sponsored subsidy schemes, such as ‘Central Scheme to provide Interest subsidy (CSIS)’

help students from the economically backward sections of society avail the benefits of a robust loan for

education.

The applicant need not repay the borrowed amount immediately. Post the completion of the course, the

repayment tenure can stretch upto 5-7 years.

Generally, loans below Rs. 4 lakhs do not require a security or guarantor.

Current Rate of Interest and Eligibility Criteria:

Upto Rs. 4 lakhs the rate of interest is not more than PLR (Prime Lending Rate). Above Rs. 4 lakhs the

rate is PLR + 1%. The amount of interest is debited to account quarterly / half yearly on simple basis

during the moratorium period. Penal interest @ 2% may be charged for loans above Rs. 4 lakhs for the

overdue period and amount.

Eligibility Criteria:

Should be an Indian National, individual whose loan has to be guaranteed by guardian or parent.

Should not have any outstanding education loan from any other bank.

Should have secured admission to professional college abroad though entrance test.

An education loan can not only fund your higher studies but also help save tax. The interest paid on the

education loan can be claimed as deduction, as per Section 80E of the Income Tax Act, 1961.

Some Important Things to Know:

The income tax benefit can only be claimed on interest part of the loan. The principal part does not

qualify for tax benefit.

However, the entire interest part of the loans repaid can be deducted while calculating your taxable

income. There is no upper limit for grant of deduction in respect of interest on loan for higher

education. Also, there is no upper limit of the rate of interest which will be allowed as a deduction.

An individual can avail of tax benefit if he/she has taken an education loan to support higher studies of

self, spouse, and children, or for the student of he/she is the legal guardian. So education loan taken for

siblings or other relatives don’t qualify for Section 80E benefit.

Deduction can be claimed by an individual only if the loan has been taken in his/her name.

This special deduction is also allowed even for education loan availed for study abroad.

This tax deduction is allowed only if the education loan has been availed from any bank or notified

financial institution or any approved charitable institution. So no deduction under Section 80E would be

available if the education loan is taken from employer, family or friends.

Under the earlier provisions, the deduction on education loan was available only for pursuing 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 and statistics. However, the

list has been expanded to even include vocational studies now.

The deduction on education can be claimed only when you start the repayment and is available up to

eight years, or until the payment of interest in full, whichever is earlier. This means, if you repay the loan

within, say, five years, you can claim deduction only till such period.

Most Education loan Interest Calculator comes with a moratorium period during which you opt not to

service the loan. This period is usually until one year after the completion of the course or six months

after the student gets a job, whichever is earlier. Accrued interest during the moratorium gets added to

the principal and repayment in EMIs gets fixed. If you opt to pay interest during the moratorium period,

it gets included while calculating the time limit of eight years.

Source: (http://www.avanse.com/calculators/emi-calculator/)