I am planning to borrow money from my cousin living abroad and use it to pay interest on my education loan to avail income tax deductions? Is it possible? What formalities do I need to fulfil? Kindly reply. Thanks
Hi,
Deduction u/s 80E for Interest on Education Loan is allowed provided the same is paid out of his income chargeable to tax.
So, if you borrow money exclusively to pay the Education Loan, then the same cannot be allowed since the amount borrowed from your cousin is not chargeable to tax and hence you are not paying the Loan out of Income chargeable to tax.
Thanks for the reply Pradeep. I really appreaciate. Can I avail deductions by way of gifts from relatives (defined as per IT Act), to pay the interest on my education loan or paying through my own taxable income is the only way?
Dear Sir,
Loan taken from private parties and interest payment to them is not available as deduction under income tax it has to be loan from financial institute or bank. You can taken gift from your cousin only if he is your real cousin otherwise it will add upto your income tax liability
Hi,
Though gift from relatives (as defined u/s 56) is exempt, to claim Deduction of Interest on Educational Loan taken from Banks u/s 80E, you have to pay the same out of incomes chargeable to tax in your hands.
Earlier there was restriction on the source of funds for claiming deduction u/s 80C of the Income Tax Act, prior to its omission by Finance Act 1990. It was clearly then stated that the payments shall be out of the Income chargeable to tax and there were controversial case laws whether such investments could be made out of borrowed funds or even accumulated incomes. Later the requirement that the payments shall be out of the income chargeable to tax was dropped. Now the only requirement is that the total deductions under Chapter VIA shall not exceed the Gross total income and in respect of deductions relating to incomes, such incomes should be part of gross total income.
In my view, there is no restriction to borrow and pay for the specified expenses / investments u/s 80C, subject to other limitations as applicable.
Edit :
In the case of deduction u/s 80E, however, it is clearly specified that deduction shall be allowed for any amount paid "out of his income chargeable to tax". Hence, the restriction on payments out of borrowed funds is clearly specified here. As a result, the payment of interest on education loan shall be out of "total income chargeable to tax during the previous year". Hence, you cannot borrow and pay the interest on education loan. However, you can borrow for the purpose of repayment of principal amount. Further, you cannot even pay the interest amount out of your accumulated income, i.e., income that is not part of current year income.
You can take and claim
Dear Sir,
For the purpose of income tax act, the following conditions needs to be satisfied:
1.The loan has been taken from a Financial Institution or a Approved Charitable Institution (not a relative or friend or any other person/entity)
2.This loan is taken for higher education for you, your spouse or your children or for a student for whom you are a legal guardian
3.The Interest is paid by you from your income which is chargeable to tax
Though, third conditions mentions that interest should be paid out of your income chargeable to tax but as one cannot trace that interest is paid out of which money, you can take deduction even from the loan taken from friends but there should not be direct Nexus between loan from friend and interest paid for educational loan.
Please feel free to call/ revert in case of any doubts
Thanks and Regards
Abhishek Dugar
CA CS B.Com
Hello Sir,
I assume you are short of money to pay your education loan and that is the reason you are borrowing money from your cousin, so that you can repay the loan and also claim interest benefit on it.
If that is the case, then yes, you may claim interest benefit on the loan taken by you.
Trust this clarifies your query.
Feel free to call / get back in case of further clarifications.
Thanking You.
Regards,
Rohit R Sharma
BCOM, ACA, LLB-GEN, CERT. FAFP
Hello Sir,
Gifts from relatives are tax free as per IT Act. Nexus of using that money is not required to claim interest benefit on education loan.
Trust this clarifies your query.
Feel free to call / get back in case of further clarifications.
Thanking You.
Regards,
Rohit R Sharma
BCOM, ACA, LLB-GEN, CERT. FAFP