Education is the premise of progress in every society, in every family. Obtaining best quality higher education is increasingly becoming a top priority for both children and parents across the globe. Having said that, the cost of higher education has increased significantly in recent years, making it difficult for many families to afford them. This has indeed led to a rise in the number of students/parents opting for education loans to fund their higher education in India or outside India. In addition to the tuition fees, education loans help cover other ever-increasing costs such as accommodation, travel for education, books and other essentials.

While education loan helps in bridging the gap between aspiration and affordability, it can pose several practical challenges and woes for students and their families. Some common issues faced by applicants include stringent eligibility criteria, collateral requirements, high interest rates, limited loan amounts, documentation hassles, repayment terms, preference for specified courses and institutions, credit history requirements and change in government regulations. Navigating these challenges requires thorough research, financial planning and proactive communication with lenders, to arrive at an informed decision.

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Despite the practical challenges and difficulties associated with obtaining an education loan, one silver lining in the cloud is the tax relief provided under Section 80E of the Income-tax Act, 1961. The interest portion of the EMI paid on education loans availed from specified institutions for the purpose of pursuing higher education, qualify for deduction under Section 80E of the Income-tax Act. Some important aspects to claim deduction are provided below:

  • Eligibility: Available only to an individual who has taken loan for the higher education of self, spouse, children or for a student for whom the individual is a legal guardian.
  • Lending institution: Loan availed only from a financial institution, or an approved charitable institution qualify for deduction.
  • Duration: Deduction available for a maximum of 8 consecutive tax years, starting from the year in which repayment of loan begins.
  • Purpose: For pursuing higher education in India as well as outside India
  • Maximum amount of deduction: Unlike some other deductions which have a capped limit, there is no upper limit on the amount of interest that can be claimed as a deduction, making it particularly beneficial for borrowers with high loan amounts and significant interest payments.
  • Tax Regime: Available only to the individuals opting for old tax regime.

Another essential factor associated with education loans is Tax Collected at Source (‘TCS’). TCS is applied by the Indian government to track the money being sent out of India under the Liberalised Remittance Scheme (‘LRS’). It is the tax to be paid when money is being sent overseas for education. Now such TCS is bifurcated and classified, as detailed in the following sentences. There is no TCS for the first INR 7 lakh remitted for education purposes. The moment the remittance (including living expenses such as food, clothing, tickets etc. for the student) goes beyond INR 7 lakhs, a TCS of 5% is applied. However, if the remittance is financed by a loan, a TCS rate of 0.5% is applicable. For any overseas remittance being made for reasons other than above, the TCS rate goes up to 20% which is a substantial number.

Having said this, credit of TCS can be claimed at the time of filing the Income-tax return, making it only a temporary cash flow factor rather than a sunk cost.

In the Interim Budget 2024, the Finance Minister made the highest ever allocation for the department of school education and literacy. Now with the full Union Budget 2024 around the corner, one may expect some relief related towards interest rates on higher education loans considering it will significantly impact the affordability of education for Indian students and their families. However, any relief towards TCS on remittances for overseas education is highly unlikely. So, guardians need to be prepared for an impact on the overall funds flow with some relief available for loan deduction and delayed refund of TCS funds.

(By Nitin Baijal, Executive Director, Deloitte India. Akshay Jain and Shweta Rajput from Deloitte also contributed to the article)

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