Interest paid on student loans is eligible for tax deduction

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I aspire to study abroad (Germany) and might need a student loan for the purpose. I have a master’s degree in biotechnology from a reputed institution and have a constant GPA of 8+. What is the procedure to apply for a student loan to pursue a PhD in Germany?

—Gurleen Singh

You need to apply to your bank or any financial institution for an education loan. The loan application can be submitted for pre-approval even before you apply to your desired university. The loan is disbursed in and must be repaid only in Indian rupees. Your application is to be submitted along with an earning co-applicant who will also be required to provide a collateral to protect the loan and will also be the guarantor of loan. The co-applicant’s income will be a criterion in deciding the approved loan amount.

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Interest paid on the loan gets deduction under Section 80E of the Income Tax Act. The deduction can be claimed for eight years from the date of repayment.

I want an education loan to pursue a master’s programme in the US. I have two options. The first is to use my fixed deposit (FD) and use an overdraft on it. The bank has agreed to 1% interest on overdraft (OD). The current rate on FD is close to 5.5%. The second option is an education loan on which I will be charged close to 9.5% reducing rate. I am leaning towards the first option, but want to be sure there are no caveats for using OD limit, such as net interest payment being higher than traditional loans as unlike a normal education loan, one starts accruing interest from the date of first withdrawal, and also implications for tax exemptions on interest payments. Kindly advise.

—Shashank

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The key factor for you is the cost of borrowing and convenience when you compare both the options, i.e. overdraft facility and an education loan. The cost in the overdraft facility comes to 6.5% (5.5%+1%). And in the case of education loan, the cost is 9.5%. As the interest is allowed as deduction under Section 80E of the Income Tax Act, the tax benefit will reduce the cost of borrowing. Assuming a tax rate at 30%, the net cost of borrowing comes to 6.65%. In case both are more or less equal, you have to look at convenience. Education loan requires an earning co-applicant and collateral, while overdraft facility has an easier process and does not require a co-applicant.

Surya Bhatia is managing partner of Asset Managers.

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