Can parents claim tax benefits on their child's education loan?

Tax on education loans: Most individuals are aware that a student availing of an education loan can claim deductions on the interest paid under Section 80E of the Income Tax Act. However, a question frequently asked is, "Can parents claim tax benefits on their child’s education loan?” The answer is yes, albeit under specific circumstances.

An individual can claim tax benefits under Section 80E only if the loan was availed for financing his higher education or of his ‘relative’. As per the Income Tax Act, the term ‘relative’ refers to the borrower’s spouse, his own children or any children for whom the borrower is a legal guardian. Thus, a parent can claim a tax deduction under Section 80E for an education loan availed for financing his child’s higher education.

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Vijay Bharech, Director, Deloitte Haskins & Sells LLP, says, "Section 80E of the Income Tax Act allows an individual to claim deduction towards interest paid on educational loan. The loan should be taken to pursue higher education for the individual, spouse, and children of the individual or the student for whom the individual is the legal guardian. Hence, a parent can claim a deduction for interest paid on a loan taken for the higher education of its children."

Further, the tax benefit under Section 80E comes into effect from the year the individual starts repaying the loan and is available only for eight successive years or until the interest is completely paid off, whichever comes first. There is no upper limit on the amount of interest one can claim as a deduction.

"Individuals can claim deduction starting from the year interest payment commences and ending with loan repayment or the 8th year, whichever is earlier. To claim deductions under section 80E, individuals should obtain education loans from banks, financial institutions, or approved charitable institutions," said Bharech. "Interest paid on loans from friends and relatives for this purpose do not qualify for such deduction," he added further.

The term "higher education" encompasses all the fields of study pursued after passing a senior secondary examination or its equivalent exam. The deductions apply irrespective of whether the educational institution is in India or abroad.

Besides, one must note that this deduction is unavailable if the individual opts for a simplified tax regime. Also, it is important to note that the benefit is applicable only to the interest component of the Equated Monthly Income (EMI) and not to the principal amount. Plus, the tax benefits are only applicable if the loan has been availed from any approved charitable institution or a financial institution.

Gaurav Aggarwal, Chief Product Officer - Credit Products, Paisabazaar.com, explains that the borrower can only claim the tax deduction to the extent of the interest component he paid. "Moreover, the model education loan scheme prepared by the IBA (Indian Bankers Association) requires the student to sign the loan agreement with his parent/guardian being the joint borrower. Thus, being a joint borrower, a parent should also be able to claim tax deductions to the extent of the interest he repaid,” added Aggarwal.

This way, fathers taking educational loans should be alert and aware of these benefits when planning their tax deductions. However, one should also consult his tax advisor regarding the scope and procedure of claiming tax deductions under Section 80E.

Also read: Here’s how you can buy health insurance for your parents and claim tax-saving benefits at work