Is it right to take education loan to study abroad?

Education loan comes with two main tax benefits that you should be aware of. One is tax deduction under section 80E of the Income Tax (IT) Act, and the other is exemption on tax collected at source (TCS).

Section 80E of the IT Act, education loan Banks applied for and select Non-Banking Financial Companies (NBFCs) are eligible for tax deduction under this section. The interest paid while paying the education loan is allowed as a deduction from the total income. Though the deduction is provided only on the interest paid on the education loan, there is no limit on the amount allowed as deduction.

TCS: The Finance Act of 2020 introduced section 206C(1G) under the Income Tax Act, which levies 5% TCS on foreign remittances. 7 lakh in a financial year. Ankit Mehra, Founder and CEO, GyanDhan said, “The TCS applicable on educational expenses arranged with education loan is only 0.5%. This means that if a student arranges educational funds through a source other than loan, tax on the amount which is . More than 7 lakh limit will be 5%. It effectively arranges funds for education abroad through cheaper and easier alternative to education loans.

For example, if the student spent the total 20 lakh for studying abroad for one year, will be applicable on TCS 13 lakh at 5% under the new rule, which means he cannot take loan from any financial institution. That way, he would have paid extra 65000 tax to the government. However, if the student had availed the same amount by way of education loan from a financial institution, 0.5% tax would be levied on the amount exceeding the permissible limit. In that case, he would have only paid 6500.

Creating Financial Prudence: The student has to manage their expenses and plan how much amount they want to spend and save to repay the loan. Since the repayment starts after the end of the course period, they have ample time to explore their repayment plans. Taking loans is a good way to develop prudent financial habits.

Creating Credit History: Taking an education loan is a good start to building a credit history that helps in applying for credit later in life. Mehra said, “Timely repayment will result in a higher credit score which reflects responsible credit behavior. This enhances their financial credibility and their chances of getting better terms and lower interest rates on home loans and other forms of credit.