The blocks in the education loan route
Vivek Kaul Monday, February 27, 2006 21:35 IST
Kunal Bajpai completed his MBA in 2002 from one of the newer institutes, whose promoter equated providing MBA degrees to soap selling. The more the merrier. This thinking led to the setting up of this particular business school across all big cities in India.
Bajpai got into the business school in 2000. When he was selected for the course, there was optimism everywhere. Hence, he did not think twice before taking an education loan of Rs 4 lakh, at an interest rate of 12%, to finance the course. The loan repayment would have to start one year after Bajpai completed the course or six months after his securing a job, whichever is earlier.
This condition essentially ensured that if Bajpai did not get a job immediately after completing the course, he had sometime to start the repayment. But back in 2000, he did not think that this would be the case. Repaying the loan would involve paying an equated monthly instalment (EMI) of Rs 8,898, six months after he started working. He would have to repay the loan through EMIs over a period of five years.
One reason for taking the loan was that under Section 80 E , he could claim a tax deduction of up to Rs 40,000 for repaying the education loan. This deduction would be available for a maximum of eight successive years.
When Bajpai started the course, he found to his horror that there were a total of 800 students in his batch. By the time he was ready to pass out of the institute, the economy was not doing well, and corporates were hardly recruiting. Those who where recruiting were paying salaries as low as Rs 10,000 per month.
Bajpai did not find a job during the extended recruitment season. After the course, he was recruited by the publications division his business school ran, at a salary of Rs 10,000 per month. By recruiting its own students, the institute was able to show 100% placement.
Bajpai started working from April 1, 2002. His first EMI was due on October 1, 2002. It was not possible for him to service an EMI of Rs 8,898 when his salary was just Rs 10,000.
The moral of the story: It’s easier taking an education loan, but at times very difficult to repay it. His parents chipped in to help him and paid the first six EMIs. From April 1, 2003, he moved on to a better job. And since then, he has been paying the EMIs himself. For April 2003 to March 2004 and April 2004 to March 2005, Bajpai was able to claim a tax deduction of Rs 40,000. Last year, the rule changed. Now, only the part of the EMI, which goes towards interest repayment, is available for tax deduction. So for April 2005 to March 2006, Bajpai can claim a tax deduction of Rs 23,050, the interest part of the EMIs for April 2005 to March 2006. This change in law works well for those who have just started repaying their loans as the interest part of the EMI tends to be higher in the initial years of repayment.
But for individuals who have taken a loan of around Rs 4 lakh, the interest part of the EMI in the first year of repayment works out to be less than Rs 40,000. Hence this change benefits those individuals who take loans of higher amounts (let’s say, for studying abroad) as their interest component is higher. Let’s say that an individual takes a loan of Rs 10 lakh at the prevailing interest rate of 11.5%. The total amount paid towards the repayment of the loan in the first year would be Rs 2,63,912. The interest part for this would work out to be Rs 1,06,895. And this can be claimed as a deduction against taxable income.
The example is hypothetical
Kunal Bajpai completed his MBA in 2002 from one of the newer institutes, whose promoter equated providing MBA degrees to soap selling. The more the merrier. This thinking led to the setting up of this particular business school across all big cities in India.
Bajpai got into the business school in 2000. When he was selected for the course, there was optimism everywhere. Hence, he did not think twice before taking an education loan of Rs 4 lakh, at an interest rate of 12%, to finance the course. The loan repayment would have to start one year after Bajpai completed the course or six months after his securing a job, whichever is earlier.
This condition essentially ensured that if Bajpai did not get a job immediately after completing the course, he had sometime to start the repayment. But back in 2000, he did not think that this would be the case. Repaying the loan would involve paying an equated monthly instalment (EMI) of Rs 8,898, six months after he started working. He would have to repay the loan through EMIs over a period of five years.
One reason for taking the loan was that under Section 80 E , he could claim a tax deduction of up to Rs 40,000 for repaying the education loan. This deduction would be available for a maximum of eight successive years.
When Bajpai started the course, he found to his horror that there were a total of 800 students in his batch. By the time he was ready to pass out of the institute, the economy was not doing well, and corporates were hardly recruiting. Those who where recruiting were paying salaries as low as Rs 10,000 per month.
Bajpai did not find a job during the extended recruitment season. After the course, he was recruited by the publications division his business school ran, at a salary of Rs 10,000 per month. By recruiting its own students, the institute was able to show 100% placement.
Bajpai started working from April 1, 2002. His first EMI was due on October 1, 2002. It was not possible for him to service an EMI of Rs 8,898 when his salary was just Rs 10,000.
The moral of the story: It’s easier taking an education loan, but at times very difficult to repay it. His parents chipped in to help him and paid the first six EMIs. From April 1, 2003, he moved on to a better job. And since then, he has been paying the EMIs himself. For April 2003 to March 2004 and April 2004 to March 2005, Bajpai was able to claim a tax deduction of Rs 40,000. Last year, the rule changed. Now, only the part of the EMI, which goes towards interest repayment, is available for tax deduction. So for April 2005 to March 2006, Bajpai can claim a tax deduction of Rs 23,050, the interest part of the EMIs for April 2005 to March 2006. This change in law works well for those who have just started repaying their loans as the interest part of the EMI tends to be higher in the initial years of repayment.
But for individuals who have taken a loan of around Rs 4 lakh, the interest part of the EMI in the first year of repayment works out to be less than Rs 40,000. Hence this change benefits those individuals who take loans of higher amounts (let’s say, for studying abroad) as their interest component is higher. Let’s say that an individual takes a loan of Rs 10 lakh at the prevailing interest rate of 11.5%. The total amount paid towards the repayment of the loan in the first year would be Rs 2,63,912. The interest part for this would work out to be Rs 1,06,895. And this can be claimed as a deduction against taxable income.
The example is hypothetical
posted by Vivek at 4:16 AM
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