How education loans can save you lakhs in taxes; check before you avail of it

For many Indian families, funding higher education, especially abroad, is a significant financial challenge. Yet there’s a trend that often surprises people: even wealthy Indians, who could easily afford the expenses outright, deliberately opt for education loans. The reason? Smart tax savings that could translate into lakhs of rupees.

“Education loans offer significant financial benefits beyond just easing cash flow,” explained experts at TaxBuddy.com. “They can reduce your tax liability substantially while also helping preserve capital for other investments.”

At the heart of these benefits is Section 80E of the Income Tax Act, which offers a valuable deduction on the interest paid on education loans. Unlike many other deductions, there’s no cap on how much interest you can claim. “There’s no limit on the deduction under Section 80E, and it’s available for up to eight years starting from the year you begin repaying the loan,” said TaxBuddy.com. However, this deduction is available only under the old tax regime—not the new one.

The deduction applies only to individuals—not HUFs or other taxpayers. The loan must be for higher education, whether in India or abroad, and can be taken for oneself, a spouse, children, or a ward for whom the individual is a legal guardian. Parents, in particular, can claim this deduction if they’ve taken a loan for their children’s education.

To qualify, the loan must come from a bank, NBFC, or an approved charitable institution. “Loans from friends, relatives, or employers won’t qualify for Section 80E benefits,” clarified TaxBuddy.com.

A unique advantage arises when funding foreign education: the Tax Collected at Source (TCS). Normally, sending money abroad for education attracts a 5% TCS on remittances exceeding Rs 10 lakh. But if the funds are routed through an education loan, this TCS drops to zero.

“For instance, if your tuition fee abroad is Rs 20 lakh, paying directly would trigger a TCS of Rs 50,000,” said TaxBuddy.com. “But if you use an education loan, you avoid this charge entirely. That’s a huge saving people often miss.”

Even wealthy individuals refrain from quickly repaying education loans because they use them strategically for tax efficiency. “Thanks to Section 80E, a 9% education loan effectively costs around 6.3% after tax benefits,” noted TaxBuddy.com. “Meanwhile, they can invest their surplus funds in assets earning 10-12%, capturing the spread as profit. It’s not simply debt—it’s strategic leverage.”

Here’s how Section 80E works in practice: suppose your gross taxable income after other deductions is Rs 6.7 lakh, and you pay Rs 2 lakh as interest on an education loan. Your taxable income becomes Rs 4.7 lakh, reducing your tax liability accordingly.

TaxBuddy.com advised that anyone claiming Section 80E should maintain proper documentation, including an interest certificate from the lender, a loan sanction letter, and ideally an EMI breakup. “Report these details under Schedule DI when filing your ITR,” they added.

Some strategic tips to maximise benefits include:

Only one co-borrower can claim the deduction, so it’s wise for the person in the higher tax slab to do so.

If interest costs are high, spreading repayments over eight years can maximise tax savings.

Combine Section 80E with deductions under Sections 80C and 80D under the old regime for optimal tax relief.

Despite the natural hesitation toward debt, experts insist education loans can be powerful financial tools. “It’s not just about avoiding loans—it’s about optimising finances,” TaxBuddy.com concluded. “Used wisely, education loans can unlock significant tax savings and preserve wealth for future goals.”

For middle-class families and wealthy investors alike, understanding these lesser-known benefits can make a crucial difference in managing education costs without sacrificing financial stability.