Income Tax 2025

Appearance

Deduction in respect of interest on loan taken for higher education. ​

129(1) ​

An assessee, being an individual, shall be allowed a deduction of amount paid as interest during a tax year, subject to the provisions of this section, on a loan taken by him from any financial institution or any approved charitable institution, if the––

  • (a) loan taken is for the purpose of pursuing higher education of himself or his relative; and
  • (b) payment is made out of his income chargeable to tax.

129(2) ​

The deduction referred to in sub-section (1) shall be allowed in computing the total income in respect of the initial tax year and seven tax years immediately succeeding the initial tax year, or until the interest on the loan is fully paid by the assessee, whichever is earlier.

129(3) In this section,— ​

  • (a) “approved charitable institution” means a registered non-profit organisation where it was approved earlier under the provisions of section 10(23C) of the Income-tax Act, 1961, or an institution referred to in section 80G(2)(a) of the said Act;
  • (b) “financial institution” means a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act) or any other financial institution which the Central Government may, by notification, specify;
  • (c) “higher education” means any course of study pursued after passing the Senior Secondary Examination or its equivalent from a school, board, or University recognised by the Central Government or State Government, local authority, or by any authority authorised by the Central Government or State Government or local authority to do so;
  • (d) “initial tax year” means the tax year in which the assessee starts paying the interest on the loan; and
  • (e) “relative”, in relation to an individual, means the spouse and children of that individual, or the student for whom the individual is the legal guardian.
Explanation

Section Summary: ​

Section 129 of the new income tax law allows individual taxpayers to claim a deduction for the interest paid on loans taken for higher education. The loan must be taken from a financial institution or an approved charitable institution, and the deduction is available for the initial tax year and the following seven years, or until the interest is fully paid, whichever comes first. The purpose of this section is to provide tax relief to individuals financing higher education for themselves or their relatives.

Key Changes: ​

  1. New Deduction Introduced: This is a new provision in the income tax law, as prior laws did not specifically allow deductions for interest on education loans under a separate section.
  2. Expanded Scope of Lenders: The deduction is available for loans taken not only from financial institutions (like banks) but also from approved charitable institutions, which was not explicitly covered earlier.
  3. Definition of Higher Education: The section clarifies that "higher education" includes any course pursued after passing the Senior Secondary Examination or its equivalent, provided the institution is recognized by the government or authorized bodies.

Practical Implications: ​

  1. For Individuals: Taxpayers can reduce their taxable income by claiming deductions for interest paid on education loans, making higher education more affordable.
  2. For Financial Institutions: Banks and approved charitable institutions may see increased demand for education loans due to the tax benefits offered under this section.
  3. For Relatives: The deduction is not limited to the taxpayer’s own education but extends to loans taken for the education of their spouse, children, or dependents under their legal guardianship.

Critical Concepts: ​

  1. Approved Charitable Institution: Refers to non-profit organizations approved under Section 10(23C) or Section 80G(2)(a) of the Income-tax Act, 1961.
  2. Financial Institution: Includes banks regulated under the Banking Regulation Act, 1949, and other institutions notified by the Central Government.
  3. Higher Education: Defined as any course pursued after passing the Senior Secondary Examination or its equivalent, provided the institution is recognized by the government or authorized bodies.
  4. Initial Tax Year: The year in which the taxpayer starts paying interest on the loan.
  5. Relative: Includes the taxpayer’s spouse, children, or any student for whom the taxpayer is the legal guardian.

Compliance Steps: ​

  1. Documentation: Maintain proof of the loan (e.g., loan agreement) and evidence of interest payments (e.g., bank statements or receipts).
  2. Eligibility Verification: Ensure the loan is taken from a financial institution or an approved charitable institution and is used solely for higher education.
  3. Tax Filing: Claim the deduction under Section 129 while filing the income tax return for the relevant assessment year.
  4. Record Keeping: Retain records of interest payments and loan details for at least seven years or until the interest is fully paid, whichever is earlier.

Examples: ​

  1. Scenario 1: An individual takes a loan of ₹5 lakh from a bank to pursue a master’s degree. The annual interest on the loan is ₹50,000. The taxpayer can claim a deduction of ₹50,000 each year for up to eight years (initial year + seven succeeding years) or until the interest is fully paid.
  2. Scenario 2: A parent takes a loan from an approved charitable institution to fund their child’s engineering education. The interest paid on this loan is eligible for deduction under Section 129, provided the parent is the one repaying the loan from their taxable income.

This section provides a structured tax benefit to individuals investing in higher education, aligning with the government’s focus on promoting education and skill development.