Advantage of Education Loan for studying abroad and saving tax

Do you think availing education loan for your ward to study abroad is a tad expensive? Well, there are many advantages of availing education loan in terms of pursuing education abroad in addition to the tax benefits. If your savings fall short of what you need for your ward’s college education abroad, you can take an education loan to meet the gap, says an FE report Education loans have tax benefits and are a better option over dipping into your retirement savings, says the report.

Neeraj Chauhan, CEO, The Financial Mall, says, “Though education loans can be repaid by the children after they start earning, there is no provision of loans for retirement.”

Interest paid on an education loan can be claimed as a deduction under Section 80E with no upper limit. This helps reduce the effective cost of the loan for you. The maximum benefit goes to those in the highest tax slab with the interest rate of 10% coming down to about 6.8%, noted the report.

However, this benefit is available only for eight years beginning from the year in which deduction is first claimed. Also, gradually the benefit will decrease as the loan is paid off, says the report.  Most scheduled commercial banks offer loan of up to Rs 40 lakh for overseas education. The interest rates offered on loans for overseas studies range from 9.5-14%. The loan amount covers tuition fees, living expenses, travel expenses, expenses related to books, equipment, library and examination and insurance premium for the student. One key requirement for an overseas education loan is that it needs a co-applicant, which can be a parent, spouse or sibling. If the borrower goes abroad during the repayment period, the lender will recover the outstanding from the co-applicant, said the report.

Tax Benefits on Education Loans

If you avail an education loan of Rs.10 lakh at 10% for seven years, the effective monthly EMI will be after the savings in tax is as follows:

  • If the tax slab is nil, while the effective interest rate is 10% and EMI after-tax savings is Rs.16, 601.
  • If the tax slab is 5%, the effective interest rate is 9.48% and the EMI after-tax savings is Rs.16, 334.
  • If the tax slab is 20%, the effective interest rate is 7.92% and EMI after-tax savings is Rs.15, 546.
  •  If the tax slab is 30% the effective interest rate is 6.88% and EMI after-tax savings is Rs.15, 034.
  • Also, a point to be noted is that the effective interest rate and EMI have taken into account the 4% surcharge on tax.

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