Taking an education loan has become a common way to finance higher studies, whether in India or abroad. To ease the financial burden on families, the Income Tax Act provides tax relief on education loans under Section 80E. However, many taxpayers remain confused about one key aspect—whether tax benefits are available if the education loan is taken from a friend or a relative instead of a bank or financial institution.
A similar query was raised by Suraj Sharma from Noida, who plans to take an education loan from his friends to fund his son’s higher education. While he intends to pay interest on the borrowed amount, his main concern is whether he can claim tax deduction on the interest paid while filing his income tax return. To clarify this, tax expert and chartered accountant Balwant Jain explained the legal position under the Income Tax Act.
Section 80E allows taxpayers to claim a deduction on the interest paid on an education loan. This benefit can be claimed for loans taken for higher education of self, spouse, or children. In some cases, it can also apply to students for whom the taxpayer is a legal guardian.
The deduction is available for a maximum period of eight consecutive years. The eight-year period starts from the financial year in which the repayment of interest begins. If the loan interest is fully repaid before eight years, the deduction ends in that year itself.
An important point to note is that there is no upper limit on the amount of interest that can be claimed as a deduction. The taxpayer can claim the actual interest paid during the financial year.
One of the most important conditions under Section 80E is that the deduction is allowed only on the interest component of the education loan. The principal repayment does not qualify for any tax deduction.
This makes education loans different from home loans. In the case of a home loan, taxpayers can claim tax benefits on both principal repayment and interest payment under different sections of the Income Tax Act. For education loans, however, only the interest portion is eligible for deduction.
This is where many taxpayers make a mistake. According to tax expert Balwant Jain, the deduction under Section 80E is available only if the education loan is taken from a recognized financial institution or an approved charitable institution.
Recognized sources include:
Banks
Non-banking financial companies (NBFCs)
Approved charitable or philanthropic institutions
If the loan is taken from a friend, relative, or any private individual, the interest paid on such a loan does not qualify for deduction under Section 80E. This rule is strictly applied, regardless of whether the borrower pays interest regularly or maintains proper documentation.
This is another key difference between education loans and home loans. In the case of home loans, tax benefits can be claimed even if the loan is taken from friends or relatives, provided other conditions are met. However, education loans do not enjoy this flexibility.
Another important condition is that the tax deduction under Section 80E is available only under the old income tax regime. Taxpayers who opt for the new tax regime cannot claim this deduction.
Therefore, before taking an education loan or planning repayments, taxpayers should evaluate whether the old tax regime is more beneficial for them overall.
If an education loan is taken jointly, the deduction must also be claimed jointly. Each co-borrower can claim deduction in proportion to the interest actually paid by them, subject to meeting all other conditions under Section 80E.
In Suraj Sharma’s case, since he plans to take an education loan from his friends, he will not be eligible to claim tax deduction on the interest paid under Section 80E. Even though the loan is for his son’s higher education and interest payments are being made, the source of the loan does not meet the eligibility criteria set under the Income Tax Act.
If your primary goal is to avail tax benefits on education loan interest, it is essential to borrow from a bank, NBFC, or approved charitable institution. Loans taken from friends or relatives may offer flexibility, but they do not provide any tax advantage under Section 80E.
Before finalizing an education loan, taxpayers should carefully consider both funding convenience and tax implications, and if needed, consult a certified tax expert to make an informed decision.
