An elaborated information on Education Loan

Students perusing Higher Education don't have to struggle hard anymore to finance their studies as now many Banks in India have are providing education loans. Not only loans, private foreign banks also seem to be interested in funding students, enthusiastic enough to announce scholarships for bright and deserving students.

With expensive professional education becoming mandatory for people across the country, an education loan seems the most effective way to tide over these expenses. Most students expect to land high salaries at the end of their professional training and are likely to be in a position to repay these loans over a period of time.

Banks in India provides financial assistance to meritorious students willing to pursue their higher studies in abroad. Undergraduate courses, Postgraduate courses and various other courses conducted by CPA in USA and CIMA in London are eligible for the educational loan.

Candidates applying for the loan should be Indian nationals and need to secure admission through entrance test or a selection procedure in renowned institutions and universities. The maximum amount of loan granted for study in India is Rs. 7.5 lacs. Students willing to study abroad can get education loan up to Rs.15 lacs. There is no margin up to Rs.4 lacs. For a loan amount above Rs. 4 lacs, 5% and 15% are the margins for Inland studies and studies abroad respectively.

Expenses taken into account:-
The student loan covers school, college or hostel fees as well as cost for buying books and other necessary items. Apart from the library, exam or library fees, even caution deposit, refundable deposit and building fund are considered for the loan.

Professional courses for which banks generally provide education loans:-
Management students are among the top choices for most of the banks. Technology students from the country's premier institutions can also get student loans from banks, and Medical and engineering college students.
Banks don't provide loans for students with a bachelor's/master's in Arts. Also, for courses where employment prospects are less (as per Bank's own evaluation), loans are sanctioned on the basis of the parents' income.

Documents required for applying education loan:-

All students are required to submit mark sheets of last qualifying examination, poof of admission scholarship, schedule of expenses for the specified course, his/her bank account statement for the last six months, an income tax assessment order for the previous two years, a brief statement of assets and liabilities, of the co-borrower, which is usually the parent or guardian and proof of income, if any.

To furnish the following documents along with the completed application form, relevant information would relate to the guardian and the student both, when the loan is jointly taken.

1) Mark sheet of last qualifying examination for school and graduate studies in India
2) Proof of admission to the course
3) Schedule of expenses for the course
4) Copies of letter confirming scholarship, etc.
5) Copies of foreign exchange permit, if applicable.
6) 2 passport size photographs
7) Statement of Bank account for the last six months of borrower.
8) Income tax assessment order not more than 2 years old
9) Brief statement of assets and liabilities of borrower.
10) If you are not an existing bank customer you would also need to establish your identity and give proof of residence.

Security required from candidates:-

1) Up to 4 lacs-No security is required

2) Loan above Rs.4 lacs and up to Rs.5.40 lacs- Third party suitable guarantee is required.

3) Loan above Rs.7.50 lacs-collateral security or guarantee of third party.

4) If the borrower is married, his or her spouse, parents-in-law or parents can act as the co-obligator.

Tax deduction:-

The deduction under section 80E is available to an individual.

1. Deduction available only to Individual not to HUF or other type of Assessee.

2. Deduction amount: – The amount of interest paid is eligible for deduction and moreover there is no cap on the amount to be deducted. You can deduct the entire interest amount from your taxable income. However there is no benefit available on the repayment of principal amount of the loan.

Earlier there was a restriction on the tax benefit to be deducted from the income. Only Rs. 40,000 per year or total amount that included both the principal and interest paid during the year, whichever is lower, was allowed as a tax benefit. Besides the tax deduction is only available if the purpose of loan is to pursue higher education i.e., full time studies in graduate or post graduate course.

Thus, you can save up to 30% of this amount as tax – depending on which income tax bracket you fall into.

3. Deduction available if Interest is been paid during the previous year and was paid out of income chargeable to tax which means if repayment is made from income not chargeable to tax than deduction will not available.

4. Loan should have been taken for the purpose of pursuing higher studies of Individual, Spouse, Children of Individual or of the student of whom individual is legal Guardian. Also, if you take the loan for your son or daughter, you would get the tax benefit – not your son or daughter.

Note: – Earlier to previous year 2006-07 the above deduction was available only for Interest on loan taken and repaid by the assessee for his own studies.

(Higher studies mean full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics.)

Income tax department has added (W.e.f. A.Y. 2010-11) additional fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, Board or University recognized by the Central or State Government will also be covered under deduction in respect of interest paid on loan taken for higher education.

5. Deduction period: - Deduction shall be allowed in computing the total income in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest is paid by the assessee in full, whichever is earlier.

The tax benefits on education loan are only valid once you start the repayment and moreover they are only available up to eight years. For instance if your loan tenure exceeds eight years, you cannot claim for deductions beyond eight years.

6. Repayments of education loan NOT covered under Section 80C.