The first question that comes to people's minds when they take a loan is: Will I get tax benefits on it?

If it is an education loan, you do.

In Need an education loan? Ask these questions, we spoke about the basics of taking a loan.

Here is what you need to know when looking at the tax angle.

Who took the loan?

You will get the tax benefit on an education loan only if the loan is in your name. You cannot claim the tax deduction if the loan is taken for someone else, be it your spouse or children or even a sibling. Only the person for whom the loan is valid will get the tax benefit.

So, if you take an education loan, you -- and not your parents or whoever took the loan -- will get the tax benefit when you start repaying it.

The tax benefit

If you take an education loan, you can claim deduction under Section 80E of the Income Tax Act. You will get a tax benefit on the interest you pay.

Initially, there was a limit on the tax benefit. The lesser of the two amounts would be valid for deduction:

i. Total amount paid during the year (principal repaid and interest paid)

ii. Rs 40,000

Now, this had been done away with. The interest you pay will be deducted from your income; there is no limit any more. It will reduce the tax you have to pay.

No deduction, however, is now available for the principal repayment.

The good news: Interest can be deducted and there is no limit to this amount.

The bad news: The principal amount is no longer eligible for deduction.

Do remember, repayments on your education loan are NOT covered under Section 80C. As mentioned above, they are covered under Section 80E of the Income Tax Act.

Take a look at What falls under Section 80C to see what is covered under this section.

The time period

The deduction mentioned above will only be applicable when you start repaying the loan.

These deductions are available upto eight years totally. You cannot claim the deduction for more than eight years.

So, even if you have a repayment time frame of 10 years, try and repay your loan within eight years. Unless, of course, the loan amount is too high for you to afford a higher repayment amount every month. 

Do note you cannot claim any tax deduction if your employer gives you a loan. Ditto for family or friends. You get these tax benefits only if the loan is from a financial institution, bank or approved charitable institution.