How to Avail an Education Loan And Get Tax Benefit

"An investment in knowledge pays the best interest." — Benjamin Franklin

And indeed, education empowers to open up new opportunities, reach new heights in our career, elevate our standard of living, and much more!

In the knowledge economy we live in today, education plays a pivotal role. Education helps one think, it helps one form and fortify new ideas and build upon them to give back to the world. And that’s one of the reasons why parents want to provide the best quality of education to their children. They are going all out to make sure their children are future ready, within their means, in this fiercely competitive world. Parents are saving and investing wisely for their children’s higher education –– it’s an innate desire for most of them.

However, many a times the pace of wealth creation does not keep up with inflation, particularly inflation in education, and here’s where education loan is a recourse that comes with a tax benefit.

Axis Bank India offers education loans at attractive interest rates for a loan amount ranging from Rs 50,000 to Rs 75 lakh or more. This literally fuels the dream of taking up professional or technical education in India or abroad.

Education loan is available for career-oriented courses like medicine, engineering, management, etc. either at a graduate or post-graduate level at institutes in India and abroad. The loan covers tuition fees, examination fees, library subscription, cost of books, needed lab tools/equipment, laptop/computer, hostel charges (if any), and so on.

Currently, Axis Bank is offering a special rate of Interest ranging from 10.5% - 12.5%*. Hurry this offer is valid only till March 31, 2018.

Who is eligible for an education loan?

Students can directly apply for an education loan. However, their parent(s) or guardian will be treated as co-applicants, and their role will be akin to a primary debtor (a person who owes money).

Eligibility criteria:

• The applicant and co-applicant(s) need to be over 18 years of age
• The co-applicant, i.e. parent(s) or guardian, need to have a regular source of income
• You need to have secured HSC with a minimum of 50% marks
• A confirmed admission from a recognised college/education institution is a must
• Both, Indian citizens and NRIs can apply, but a valid passport is a must for the latter

What are document required?

The following need to be submitted along with the education loan application form:

• Income statements (Salary slip, Form 16, Income-Tax Returns of the last 2 years, and Computation of income of last 2 years certified by a Chartered Accountant)
• Bank Statement/Pass Book of last 6 months
• Copy of the admission letter of the Institute along with the ‘fee schedule’
• Mark sheets and/or pass certificates of SSC, HSC, Degree Courses, National level entrance test
• Age proof (birth certificate, passport, Aadhaar, PAN card, driving license)
• Address proof (Aadhaar, passport, latest electricity bill, latest telephone bill, ration card, existing house lease agreement, bank account statement)
• Photo identification proofs (Aadhaar, voter id, PAN card, passport, driving license)
• Passport size photos of the applicant and co-applicants
• Guarantor form (optional)

Usually, for a loan amount below Rs 4.0 lakh a guarantor is not required, but this varies on a case-to-case basis.  

For an education loan amount ranging between Rs 4.0 lakh and Rs 7.5 lakh, apart from co-applicant(s), a third-party guarantee is needed from a person who is not a blood-relation (an acquaintance, friend, or any other relative). This is a further layer of security for the bank in case co-applicant(s) / second-person guarantee fail/s to repay.

For education loans above Rs 7.5 lakh, banks insist on tangible collateral security of a suitable value.

After a thorough due diligence, the bank shall sanction the education loan. Axis Bank usually disburses loans within 15 working days from the date of receipt of the complete application along with all documents required for a full appraisal.

The documents required for the first disbursement are:

• Demand Letter from college or university
• Disbursement Request Form signed by applicant, Co-applicants
• Signed copy of Loan Agreement (which includes Demand Promissory Note, DP Note Delivery-cum-Waiver Letter, Standing Instruction Request, PDC (Post-dated Cheque)
• Sanction Letter signed by applicant, co-applicants
• Form A2 signed (for purchase of foreign exchange) by applicant or co-applicants in case abroad Institute cases
• Receipts of Margin Money paid to the college/university along with bank statement reflecting the transaction
• Documents for collateral security ( if applicable)

The education loan disbursements can be done in full or in suitable instalments as per your requirements/fee schedule. In addition to the above, for subsequent disbursement, i.e. in instalments as per fee schedule, Exam Progress Report or, Marksheet, or Bonafide Certificate is needed.

In the entire process, if you as co-applicant(s)——parent(s) or guardian——have a good credit history, faster loan disbursals can be expected.

What is the tax benefit?

When you avail an education loan, the interest paid (which is a component of your EMI) on the education loan is allowed as a deduction under Section 80E of the Income Tax Act, 1961. The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier.

It is vital to note that the deduction can be claimed only if the education loan has been taken from a bank, approved financial institution, or an approved charitable institution.

Here a few more points to remember…

• Who can claim this deduction: Only an individual can claim this deduction. It is not available to a Hindu Undivided Family (HUF) or any other kind of taxpayer. Further, the loan should be taken for the higher education of self, spouse, children, or the student for whom the individual is a legal guardian. Thus, parents can easily claim this deduction for the loan taken for the higher studies of their children.
• The purpose of the loan: The loan should be taken to pursue higher studies. It does not matter whether the education loan is taken for higher studies within India or abroad.
• Deduction Amount: The deduction amount is allowed on the total interest paid (which is part of the EMI) on education loan during the financial year. There is no limit on the maximum amount that is allowed as deduction. However, there isn’t a tax benefit on the repayment of the principal amount (which is the second part of the EMI).
• Period of deduction: The deduction is available from the year you start paying the interest on the education loan, and the seven immediately succeeding financial years or until the interest is paid in full, whichever is earlier.

Wish to get a broad sense of how much the EMI on an education loan would be?

Yes?

Use Axis Bank’s education loan EMI calculator –– it’s a comprehensive resource. All you have to do is input the relevant data in the required fields and it’ll produce the result in less than a minute.

Here are 6 benefits of availing an education loan:

• Your existing finances are not exhausted.
• The loan can be worked out to suit your budget and requirements, facilitating you to save.
• You don’t have to utilise your existing investments assigned for other important financial goals such children’s marriage needs, your own retirement, among a host of others.
• The loan is usually disbursed within 15 working days.
• The interest rates on education loan are competitive.
• The interest component of the education loan EMI is allowed as a deduction under Section 80E of the Income Tax Act, 1961.

To conclude…

Education is a long-term personal investment that has the potential to generate returns than none other. Access to education loans is worth it for the returns you can reap in the long run.

There are many prestigious schools and universities you can consider. Just make sure they are accredited by the Ministry of HRD and administered by the Ministry of Tourism.

This way you will make an informed choice.

“Education is the passport to the future, for tomorrow belongs to those who prepare for it today.” ––Malcolm X

Happy Banking!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.