India has a distinct stature of producing one of the highest number of graduates every year, however, there's still a large section of students not being able to pursue higher education mainly due to financial constraints. Various schemes have been launched and incentives provided from time to time both by the government and the civil society to promote education among the masses.

In this context, there is a beneficial provision under the Income Tax Act, 1961 (the 'Act'), which provides for deduction to be claimed by an individual in respect of the interest paid on loan taken for educational purposes. An individual may claim a deduction out of his total income chargeable to tax for interest paid on loan taken by him from any financial institution or an approved charitable institution for the purposes of pursuing his higher education or for the purposes of higher education of his relative.

TIME PERIOD FOR CLAIMING DEDUCTION

The deduction can be claimed for eight financial years starting from the year in which the person availing of the loan starts paying the interest or until the interest on such loan is paid in full, whichever is earlier.

LOAN TO BE TAKEN FROM

An individual may avail of loan from a financial institution i.e, bank or other institution as is notified by the government in this respect. The loan may also be taken from an approved charitable institution as specified under the Act.

HIGHER EDUCATION

Earlier, higher education primarily meant full-time studies for any graduate or postgraduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences, including mathematics and statistics. The scope of the said provision has been widened significantly to provide support to the individuals to pursue higher education beyond senior secondary examinations by taking necessary education loan as required. Thus, effective April 1, 2010, the higher education has been defined to mean any course of study pursued after passing the senior secondary examination or its equivalent from any school, board or university recognised by the central or state government or such other authority as per the provisions of the Act.

WHO CAN TAKE THE LOAN

It could be taken by an individual either for pursuing his higher education or for the higher education of his spouse, children or student for whom such individual is a legal guardian.

DIRECT TAX CODE

It is quite encouraging to note that even though many of the existing deductions / exemptions are proposed to be done away with under the proposed Direct Tax Code (DTC), however, deduction in respect of interest on loan taken for higher education does find its place under the DTC. The provisions for claiming deduction under the DTC are akin to the existing provisions under the Act. It is, however, important to note that under the DTC, deduction is proposed to be allowed in respect of the loans taken from financial institutions only.

IMPORTANT POINT TO NOTE

It is pertinent to note that even though the loan could be taken by the child or his parents for the higher education of the child, the deduction can, however, be claimed only by an individual who has taxable income. Therefore, besides other considerations and subject to the facts and circumstances of a particular case, loan may primarily be taken by the individual (parent or student) who has / will have taxable income to claim this deduction.