While India has the distinction of producing one of the highest number of graduates every year, it has a large section of students who are not able to pursue higher education. One of the key reasons is the financial constraint faced by them. Various schemes have been launched and incentives provided from time to time by the government to promote education at the grass root level. In this context, a beneficial provision is provided under the Income Tax Act, 1961, which provides for a deduction to be claimed by an individual in respect of the interest paid on loan taken for higher education.
An individual may claim a deduction out of his or her total income chargeable to tax for interest paid on loan taken by the individual from any financial institution or an approved charitable institution for the purposes of pursuing his or her higher education or for the purposes of higher education of a relative. The deduction can be claimed for eight financial years starting from the year in which the person availing the loan starts paying the interest or until the interest on such loan is paid in full, whichever is earlier.
An individual may avail loan from a bank or other institution as is notified by the government. The loan may also be taken from an approved charitable institution as specified under the Act. The higher education has been defined to mean any course of study pursued after passing the senior secondary examination or its equivalent from any school, board or university recognised by the central or state government or such other authority as is specified.
The education loan could be taken by an individual either for pursuing his or higher education or for the higher education of the spouse, children or student for whom such individual is a legal guardian. It is quite encouraging to note that even though many of the existing deductions/exemptions are proposed to be done away with under the Direct Taxes Code (DTC), deduction in respect of interest on loans taken for higher education does find its place under the DTC.
The provisions for claiming deduction under the DTC are akin to the existing provisions under the Act. It is, however, important to note that under the DTC, deduction is proposed to be allowed in respect of the loans taken from financial institutions only.
It is pertinent to note that even though the loan could be taken by the child or his or her parents for the higher education of the child, the deduction can be claimed only by an individual who has taxable income. Therefore, besides other considerations and subject to the facts and circumstances of a particular case, the loan may primarily be taken by the individual (parent or the student) who has/will have taxable income to claim this deduction.
The writer is executive director, KPMG