Taking an education loan is a good start to building a credit history that helps apply for credit later in life. Generally, when you plan your finances for your child’s education abroad, you need to consider many types of expenses, including college fees, costs for accommodation, necessities such as laptops, books, coaching fees, etc.
Education loan comes with two main tax benefits that you should know. One is tax deduction under Section 80E of the Income Tax (I-T) Act, and the second is a concession on Tax collected at source (TCS).
Section 80E of the I-T Act: Education loans applied from banks and select Non-Banking Financial Companies (NBFCs) are eligible for tax deduction under this section. The interest paid while repaying the education loan is allowed as a deduction from the total income. Though the deduction is provided only on the interest paid on an education loan, there is no cap on the amount allowed as deduction.
Tax collected at source (TCS): The Finance Act of 2020 introduced Section 206C(1G) under the Income Tax Act, which imposes a 5% TCS on foreign remittances exceeding ₹7 lakh in a financial year. Ankit Mehra, founder and CEO, GyanDhan, said, “The TCS applicable on educational expenses arranged with an education loan is only 0.5%. It means that if a student arranged for educational funds through any other source apart from a loan, the tax on the amount that exceeds ₹7 lakh cap would be 5%. It effectively makes arranging funds for abroad education through an education loan cheaper and an easy choice.”
For instance, if the student spent an overall ₹20 lakh for studying abroad for a year, the TCS would be applied on ₹13 lakh at 5% under the new rule, which means he couldn’t source a loan from a financial institution.
This way, he would have additionally paid ₹65,000 tax to the government. However, if the student had sourced the same amount through an education loan from a financial institution, the amount over the permissible limit would have been taxed at 0.5%. In that case, he would have paid only ₹6,500.
Instilling financial prudence
The student has to manage their expenses and plan out what amount they want to spend and save to repay the loan. Since the repayment starts after the course period ends, they have ample time to figure out their repayment plans. Taking a loan is a good approach to instil prudent financial habits.
Building a credit history
Taking an education loan is a good start to building a credit history that helps apply for credit later in life. Mehra said, “Timely repayments will result in a high credit score reflecting responsible credit behaviour. It increases their financial credibility and chances of getting better terms and lower interest rates on home loans and other forms of credit.“