Section 80E Deduction – Eligibility Criteria & Clarification on Payment vs. Accrual Basis

Section 80E of the Income Tax Act provides an important tax benefit for individuals repaying education loans. However, taxpayers often face confusion about its exact eligibility and whether interest deductions can be claimed on an accrual basis or only on actual payment.

1. Who Can Claim the Deduction?

• Only individual taxpayers are eligible. Hindu Undivided Families (HUFs) or companies cannot claim the benefit.
• The borrower can claim for loans taken for:
  • Self
  • Spouse
  • Dependent children
  • A student for whom the taxpayer is a legal guardian

2. Purpose & Source of Loan

• Loan must be for higher education — any full-time or vocational course pursued after completion of Class XII.
• Must be from a recognised financial institution, an approved charitable institution, or a notified NBFC.
• Loans from relatives, friends, or employers are not eligible.

3. Scope of Deduction

• Only the interest component is deductible.
• There is no upper monetary limit on the deduction.
• Available for up to 8 consecutive assessment years beginning from the year interest repayment starts, or until the interest is fully repaid — whichever is earlier.
• Principal repayment is not eligible.

4. Payment vs. Accrual Basis — Key Rule

The Income Tax Act’s wording in Section 80E states “any amount paid by him in the previous year”, which clearly requires actual payment from the taxpayer’s income chargeable to tax.

This means:

• Deduction is allowed only for interest actually paid during the year.
• Not allowed for:
  • Interest merely debited to the loan account by the bank
  • Interest that has accrued but not been repaid
  • Interest during a moratorium period where no payment is made

5. Judicial & Professional Position

• No case law exists allowing Section 80E deduction on an accrual basis.
• Tribunal and professional opinions are consistent:
  Deduction is strictly on payment basis — no exceptions.
• Courts have emphasised that “incurred” in the context of Section 80E is to be read as paid, not merely due.
• Other sections of the Income Tax Act may follow an accrual method, but Section 80E is expressly drafted to require payment.

6. Documentation Required

To claim, the taxpayer must keep:

• Interest certificate from the lender showing bifurcation of principal and interest actually paid during the financial year.
• Bank statements or proof of payment.

Final Takeaway

Section 80E is a valuable benefit for those repaying education loans, but it operates on a strict “pay to claim” principle.

• No matter when interest is accrued, only payments made during the financial year qualify.
• Taxpayers should time their repayments wisely and maintain proper proof to maximise the benefit.