Can you get tax benefits on education loans taken from NBFCs?

If the borrower’s return is scrutinized, the tax liability will come out higher than declared and the deduction would be disallowed.

Education loans from NBFCs do not qualify for tax exemption under Section 80E of the Income Tax Act of India. To avail of the tax exemption, the education loan must be taken from a financial institution that is notified by the Central Board of Direct Taxes (CBDT). For instance, tax exemption can only be availed on loans from banks and HDFC Credila.

Gaurav Jalan CEO and Founder, mPokket, says, “Borrowers should be made aware of the fact that they cannot claim a tax deduction when they are applying for a loan. One should note that it will impact the effective interest rate, particularly if the applicant and the co-applicant are in a high-income-earning bracket.”

Other than that, whether notified or not, NBFCs give out borrowers their loan statement, when requested by them, with the principal amount and the interest paid during that year, which can be submitted by the borrower to avail the deduction.

Having said that, Jalan adds, “if the borrower’s return is scrutinized, the tax liability will come out higher than declared and the deduction would be disallowed. It could also result in a penalty for concealment of income and submitting fabricated documents under Section 270A of the Income Tax Act of India.”

Even though the tax exemption affects the cost of the loan, borrowers are often recommended by experts to apply for the loan from an NBFC as it affords them ease in securing funds for their education, especially in cases where they cannot pledge collateral. Jalan says, “Customers are drawn to NBFCs for their instant loan approval with several of them offering pre-admission loan sanction letters, a feature that’s unique to NBFCs.”

How to avail tax exemption on your education loan;

To avail of the tax deduction, experts say the borrower should transfer the loan to a bank when the course has ended, and the Equated Monthly Installment (EMI) has started. Additionally, one can also opt for a secured education loan from public sector banks. These loans have a lower rate of interest and processing fee, and a longer moratorium period. “These factors alone could bring down the cost of the loan significantly,” adds, Jalan.

However, industry experts say despite this obvious drawback, NBFCs continue to increasingly dominate a larger share of the market. It is mostly due to the flexibility and convenience of availing of a loan that attracts the customer and draws them away from traditional lenders like banks. There are easier, faster, and different financing options available from an NBFC with a quick documentation process and instant approval, a feature that compels students to rush to NBFCs for a loan.

Jalan further suggests, “Students pledge collateral to avail of the exemption and be eligible for a higher loan amount limit. The added benefit is of an interest subsidy under the Central Sector interest subsidy Scheme that is only applicable on education loans from banks.”