My daughter wishes to pursue MBA abroad. Should I use my retirement fund or take an education loan?

I am retiring this month and will get around Rs 1.1 crore as retirement benefits. I have frugal life style. I have some savings and will also get pension. I will also get a share in ancestral house as and when it is sold. Both my children are engineers and are presently working for MNCs. Now my daughter wishes to pursue MBA from a reputed European College. The fee and living expenses for the entire course will be around Rs 1.1 crore. I am ready to give her the entire amount. (She also has Rs 30 lakh in MF, NPS, EPFO that she has saved in the last four years).

Should I pay her entire fee from my retirement emoluments or should we take an education loan? Education loan interest will be at 10.5% per annum but I assume after tax benefits it will be effectively cost us about 7.3% per annum and my Rs 1.1 crore will be available to me for investment. Is it prudent to put this corpus into index funds or buy a small flat in Gurugram and keep paying loan EMI for next 8-15 years? Alternatively, should I go for 50:50 (Pay Rs 55 lakh upfront & take Rs 55 lakh loan)? Kindly advise me.

Reply by Balwant Jain, a tax and investment expert

The retirement corpus is meant to take care of all the expenses during your retirement and should not be touched to meet any other expenditure under any circumstance. Since you have not mentioned the amount of pension and your monthly expenses I have presumed that the pension will be broadly sufficient to meet your day today expenses. Even if your day-to-day expenses would be met from your pension, there may arise some unexpected situation like a medical emergency which may require you to draw upon your savings. Looking at the fact that the hospitalisation costs are rising disproportionately I feel that the retirement savings should not be appropriated towards any other purpose.

I strongly advise you to go for the highest amount of education loan available. Since the servicing of the education loan starts only after she completes the course and as she will be able to get good job, servicing the education loan should not be an issue for her. Since she is already working, let her shoulder the responsibility of servicing the education loan herself. I feel she will be able to get better tax benefits by servicing it by herself.

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As you do not need income from your retirement corpus, it makes sense for you to invest the same in a safer broader index or hybrid fund. The after-tax returns on index funds are likely to be higher than the post-tax effective interest rate on education loans, so it is more advisable to go for the maximum available loan and invest the funds in equity index funds. Please keep some money invested in fixed deposits or liquid fund to take of any emergency like situation in future.

Please do not take exposure to real estate at this age as it is very illiquid and indivisible in case you need some funds to meet any emergency, especially a medical emergency. In my opinion it will be difficult for you to get a home loan for buying a property once you retire. Moreover, it is never advisable to take any additional financial responsibility like home loan once you retire.