Education loan from NBFC may not qualify for tax deduction

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NEW DELHI: Education loans from non-banking financial companies (NBFCs) may not qualify for tax deduction. For a borrower to avail of the benefit, loan must be from government-notified financial institution.

“Regulations state that the loan should be taken from any bank, approved charitable institution or ‘notified’ financial institution. Borrowers can only avail the tax deduction if the loan is from NBFCs that the Central Board of Direct Taxes (CBDT) has notified,” said Naveen Wadhwa, deputy general manager, Taxmann, a research and advisory firm.

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CBDT has notified only a few NBFCs in this case.

A borrower can get the deduction under Section 80E on the interest portion of an education loan taken for higher studies. The student, or a close relative (spouse, children, or legal guardian), can avail of it for up to eight years.

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Borrowing for higher education is among the big loans that an individual avails in his lifetime. Like in the case of home loan, tax deduction can help lower the burden of an education loan.

“Not many are aware that CBDT has notified only a few NBFCs. Usually, borrowers approach NBFCs for the interest certificate in March. Whether notified or not, NBFCs give borrowers loan statement that states the principal and interest paid during the year,” said says Arjun Krishna, co-founder, WeMakeScholars.com, an online loan and scholarship consultant.

They submit the statement to their chartered accountants, who avail the deduction, according to Krishna.

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But this could have consequences. “There could be problems if the borrower’s returns come up for scrutiny. In such a case, the tax department would ask the borrower to submit evidence for the returns filed. If the borrower had claimed a deduction for an NBFC that CBDT has not notified, the tax officer would disallow the deduction,” said Wadhwa.

Retrospectively, the borrower’s taxable income will be higher than declared. Consequently, the tax officer will point out that the tax liability was higher than declared.

The borrower will need to pay the tax liability and applicable interest. There could also be a penalty under 270A which deals with concealment of income or furnishing inaccurate particulars of the income.

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If you are going for a new loan, check with the lender whether it is notified or not. If you have an ongoing loan and unsure about the lender’s status, you must email and check. Avoid talking on the phone with a customer care executive.

If CBDT has not notified your lender, don’t take the deduction under Section 80E. The other option is to shift your education loan to a bank if you have finished your course, and the regular equated monthly instalment or EMI has started.

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