Now, Parents May Be Able to Claim Tax Benefits on Higher Education Loans for Children
The Union Budget 2007-08 has brought some good news for students pursuing higher education and for their parents. If the proposals stated in the Budget do fructify, it will be possible for a taxpayer to claim deduction on account of interest on education loan taken for one’s children or spouse.
The memorandum to the Budget specifies that: “It is proposed to amend Section 80E so as to allow the deduction of interest on loan taken by an individual for higher education of his relative also. It is also proposed to define the term ‘relative’ for the purpose of Section 80E so as to mean spouse and children of the individual.”
This amendment holds important implications. Currently, only an individual who has taken loan for pursuing his/her higher education is eligible for tax benefits. The relief is not allowed to parents, but to the student himself/herself when he/she starts repaying the amount.
Now, it has been proposed that the tax benefits can be availed of even by ‘relatives’. With this, parents/spouse can take a loan for their children’s/spouse’s higher education and claim tax relief on repayment of interest. This amendment will apply in relation to the assessment year ’08-09 and subsequent years.
This will be a major advantage for parents of children pursuing higher studies. They will be able to lower their overall tax liability by claiming deduction on account of interest paid on the education loan. For students, this means that some part of the liability on account of the loan will have been paid off by the time they start their career. However, industry players are yet to read the fine print and decide how to put the revised education loan scheme into practice.
Says a senior manager with a public sector bank. “At present, the loans are disbursed in the student’s name. But with the possible amendment, we have to see if the bank can sanction a loan in the parent’s name so that they can seek tax relief.”
The amendment also raises a few questions. One will be able to say something definitively only once the details are disclosed by the tax authorities and by banks giving out education loans.
Here, we attempt to answer, with whatever information is currently available, a couple of basic questions that could crop up in a few cases.
Is it better to take an education loan than finance it from one’s own pocket? Bankers say that demand for education loans has picked up, as the cost of higher education has surged by 20-50% in the past few years. Now, with the proposed amendment, bankers see a further rise in the demand for education loans.
Industry players say that many institutes demand a huge portion of the fees as an upfront payment. This could drain the savings and disturb personal finances of parents. An education loan is more attractive now as even parents will be able to seek a tax relief on the same.
Should the parent take the loan? “In the current situation, the bank always disburses a study loan in the name of the student who has signed up for a course. A parent can only sign as a guarantor for the loan,” says a senior manager with Andhra Bank.
However, banking sources also say that soon, a time may come when the bank will sanction loans in the parents’ name. In such cases, there are two ways in which a study loan can be repaid.
One option is that the parents can service the interest component of the loan during the study period of the student. In this option, both the parents and the student stand to gain. Parents can seek tax relief to the extent of the interest outgo and the burden of repayment reduces considerably on the student.
The second option is to start repaying the loan once the student takes up a job. In this case, the student repays the loan.
However, these deductions are available up to a period of eight years. Please note that you cannot claim any tax deduction if your employer gives you an education loan. This also applies for family or friends. You have to borrow from a bank or financial institution or approved charitable institution to claim tax benefits.
The memorandum to the Budget specifies that: “It is proposed to amend Section 80E so as to allow the deduction of interest on loan taken by an individual for higher education of his relative also. It is also proposed to define the term ‘relative’ for the purpose of Section 80E so as to mean spouse and children of the individual.”
This amendment holds important implications. Currently, only an individual who has taken loan for pursuing his/her higher education is eligible for tax benefits. The relief is not allowed to parents, but to the student himself/herself when he/she starts repaying the amount.
Now, it has been proposed that the tax benefits can be availed of even by ‘relatives’. With this, parents/spouse can take a loan for their children’s/spouse’s higher education and claim tax relief on repayment of interest. This amendment will apply in relation to the assessment year ’08-09 and subsequent years.
This will be a major advantage for parents of children pursuing higher studies. They will be able to lower their overall tax liability by claiming deduction on account of interest paid on the education loan. For students, this means that some part of the liability on account of the loan will have been paid off by the time they start their career. However, industry players are yet to read the fine print and decide how to put the revised education loan scheme into practice.
Says a senior manager with a public sector bank. “At present, the loans are disbursed in the student’s name. But with the possible amendment, we have to see if the bank can sanction a loan in the parent’s name so that they can seek tax relief.”
The amendment also raises a few questions. One will be able to say something definitively only once the details are disclosed by the tax authorities and by banks giving out education loans.
Here, we attempt to answer, with whatever information is currently available, a couple of basic questions that could crop up in a few cases.
Is it better to take an education loan than finance it from one’s own pocket? Bankers say that demand for education loans has picked up, as the cost of higher education has surged by 20-50% in the past few years. Now, with the proposed amendment, bankers see a further rise in the demand for education loans.
Industry players say that many institutes demand a huge portion of the fees as an upfront payment. This could drain the savings and disturb personal finances of parents. An education loan is more attractive now as even parents will be able to seek a tax relief on the same.
Should the parent take the loan? “In the current situation, the bank always disburses a study loan in the name of the student who has signed up for a course. A parent can only sign as a guarantor for the loan,” says a senior manager with Andhra Bank.
However, banking sources also say that soon, a time may come when the bank will sanction loans in the parents’ name. In such cases, there are two ways in which a study loan can be repaid.
One option is that the parents can service the interest component of the loan during the study period of the student. In this option, both the parents and the student stand to gain. Parents can seek tax relief to the extent of the interest outgo and the burden of repayment reduces considerably on the student.
The second option is to start repaying the loan once the student takes up a job. In this case, the student repays the loan.
However, these deductions are available up to a period of eight years. Please note that you cannot claim any tax deduction if your employer gives you an education loan. This also applies for family or friends. You have to borrow from a bank or financial institution or approved charitable institution to claim tax benefits.
Labels: Education Loan, Personal Finance, Tax Benefits
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