How tax deductions make education loans attractive

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₹50 lakh for his studies. Mehra had a rich stock portfolio, besides a property in Delhi-NCR that he could have sold off to pay for his studies. “I opted for an education loan because I felt that my corpus would fetch me returns that would negate what I had to pay as the interest on the education loan," says Mehra, who is now co-founder and CEO of GyanDhan, an education financing marketplace.

Some parents, though, want their children to learn financial discipline while doing their studies. Kulwant Singh Kalra, for example, self-financed the first-year course fee for his son who is studying culinary management in Canada. “The work culture in Canada allows students to take up part-time jobs for a few hours every week.

I want my son to earn and save for his education fee next year onwards. I am always there to chip in if there is an issue but he must take on that financial responsibility right away," he says. Experts say opting for an education loan has other advantages.

For instance, section 80E of Income Tax Act allows you to claim tax deduction on the interest component of the education loan EMI without any upper limit. Moreover, one can claim it for a maximum of eight financial years after the repayment begins. Notably, principal payment doesn’t offer any tax relief.

To illustrate this better, let’s take the hypothetical case of Ravi, who is in the 30% income tax slab rate and needs ₹1 crore to fund the higher education of his child. He can liquidate his stock portfolio for this purpose. However, he chooses to take an education loan for a tenure of 8 years to reduce his tax liability.