How tax deductions make education loans attractive

To be sure, students can avail an education loan that they can repay later after they get a job. However, many parents tend to self-finance this major expense from their accumulated investments so far, rather than burdening their children with loans. Experts, however, warn against this trend and say that educational loans help in terms of returns and taxation.

“If you can use your savings wisely, your corpus can give you better returns than the full interest outlay on an education loan. In addition, the annual interest payment makes you eligible for tax deduction,” says Anurag Jain, co-founder and partner at ByTheBook Consulting LLP .

That’s exactly what Delhi-based Ankit Mehra (38) did. He was 28 years old when he decided to go for an MBA from IESE Business School, Barcelona, ​​in August 2013 and he needed more than that. ₹50 lakh for his studies. Mehra had a rich portfolio of stocks, apart from a property in Delhi-NCR which he could have sold to pay for his studies. “I opted for an education loan because I felt that my corpus would get me returns that would negate the amount I had to pay as interest on the education loan,” says Mehra, who is now co-founder and CEO of GyanDhan, an education officer . financing market.

However, some parents want their children to learn financial discipline while studying. For example, Kulwant Singh Kalra 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 accept part-time jobs for a few hours each week. I want to earn and save my son for his education fee next year onwards. I’m always there to step in if there’s a problem but he has to take that financial responsibility right away,” he says.

No limit on tax deduction

Experts say there are other benefits to opting for an education loan. For example, section 80E of the Income Tax Act allows you to claim a tax deduction on the interest component of the IEA education loan without any ceiling. Moreover, it can be claimed for a maximum of eight financial years after the repayment begins. In particular, the payment of principal does not 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 his requirements. ₹1 crore to fund their child’s higher education. He can liquidate his stock portfolio for that purpose. However, he chooses to take an education loan for a tenure of 8 years to reduce his tax liability. Ravi will pay ₹51.57 lakh as interest for 8 years on the education loan (see graphic). However, he can save ₹15.47 lakh in taxes cumulatively during this period. Meanwhile, his ₹1 crore stock portfolio would grow, assuming a CAGR of 10% ₹2.14 crore.

Financial experts say it is better if the parents pay the loan installments. The person paying the EMIs will be eligible to claim section 80-E tax deduction. “We recommend to our clients that parents should take advantage of this benefit as their tax liability will be higher than their child who has just started a job,” says Jain.

Know your risk-appetite

Although financial experts ask their clients not to take on debt, they also inform you that some loans are productive. “I tell my clients to avoid all debt except home and education loans. The repayment is structured in a way that benefits the borrower,” says Jain.

However, first comes a taste of risk. So, Mehra de GyanDhan decided to pay off his education loan first before deciding to launch his startup. “I felt the need to minimize my risk exposure in other areas. I started selling my investments in the stock market and completed the sale of my property in Delhi-NCR. When I moved back to India in May 2015, I consolidated all my finances, and paid off the entire loan in one go, says Mehra.

Consider ancillary costs

Parents also need to factor in ancillary costs that take care of the living expenses of their wards studying abroad. Kumar Vishal Singh, a resident of Noida, says that he recently got his son Krish Singh admitted to the four-year B.Tech (Hons) course in Mechatronics from the University of Sydney, and wanted to get part payment for ₹1 crore fees. However, it was necessary to maintain at least ₹30 lakh in his bank account for his son’s visa process. He then confirmed that ₹1.2 crore loan from a private sector bank at an interest rate of 9.25%. The monthly EMIs came in at ₹1.44 lakh “There must be enough funds in the bank account to take care of other educational expenses like hostel, food, books and travel. That is why I prefer to keep my savings and take an education loan. Besides, loan IMEs help me claim deductions that reduce my tax liability,” says Singh.

Those who choose to study abroad must take into account the tax collected at source (TCS), with effect from 1 October. Any foreign transaction beyond the threshold of ₹7 lakh per financial year per person will attract TCS at the rate of 20%, except in education and medical transactions. In the case of education, TCS will also be applicable ₹7 lakh at 0.5% (if the payment for education is financed through an education loan) or 5% (in case it is self-financed). So if you are sending ₹1 crore to a foreign university, and assuming there is no other foreign payment, the bank will collect tax on ₹93 lakh (see graphic). As this is an advance tax, you can get it back as a refund when you file your income tax return.

The moratorium

Banks usually offer students a loan repayment holiday while they study, known as a moratorium period. It lasts for the duration of the course and is extended for approximately 12 months afterwards. Students do not have to pay EMIs during this moratorium, but interest is calculated immediately after the loan is disbursed. “As per Indian Banks Association (IBA) Model Education Loan Scheme, banks are required to charge simple interest on the loan amount (if the foreign education loan amount is up to ₹20 lakh) during the moratorium period. This amount is added to the principal amount and EMI is calculated accordingly when the repayment starts,” says Adhil Shetty, CEO and co-founder of BankBazaar. Some private banks may charge compound interest during this period. Financial planners say that you should borrowers to pay that amount. interest component during the moratorium period to avoid additional interest outflows “Those who service the interest component during the moratorium period can get 1% interest concession as per the IBA provision,” says Shetty.