NBFC education loans are not eligible for tax relief under Section 80E of the Indian Income Tax Act. The education loan must be obtained from a financial institution that has been approved by the Central Board of Direct Taxes to qualify for the tax exemption.
For example, tax exemption is only available on the bank and HDFC Credila loans.
Borrowers should be informed that they will not be able to claim a tax deduction if they apply for a loan. It’s important to keep in mind that it will affect the effective interest rate, especially if the applicant and co-applicant both earn a lot of money.
Aside from that, whether borrowers are notified or not, NBFCs provide borrowers with their loan statement, which includes the principal amount and interest paid over the year and can be filed by the borrower to claim the deduction.
If the borrower’s return is examined, the tax liability will be found to be larger than stated, and the deduction will be denied. It could also result in a penalty under Section 270A of the Income Tax Act of India for concealing income and providing forged documents.
Even though the tax exemption influences the loan’s cost, experts generally advise borrowers to apply for a loan from an NBFC since it makes it easier for them to secure cash for their education, especially if they cannot pledge collateral.
Customers are attracted to NBFCs because they offer rapid loan approval, with several of them even offering pre-admission loan sanction letters, which is a feature that is only available to NBFCs.
How to get a tax break on your student loan-
Experts advise that once the course has concluded and the Equated Monthly Installment (EMI) has begun, the borrower should transfer the loan to a bank to take advantage of the tax deduction.
Another option is to take a secured education loan from a public sector bank. These loans feature a cheaper interest rate and processing charge, as well as a longer grace period. These things alone could drastically reduce the loan’s cost.
Regardless of this evident disadvantage, NBFCs continue to gain a larger proportion of the market. It is mostly because of the flexibility and simplicity of obtaining a loan that customers are drawn away from traditional lenders such as banks.
An NBFC can provide students with easier, faster, and more diverse financing choices, including a rapid documentation process and instant approval, a characteristic that encourages students to rush to NBFCs for a loan.
To qualify for the exemption and a greater loan amount limit, students must pledge collateral. An interest subsidy under the Central Sector Interest Subsidy Scheme, which is solely available on education loans from banks, is an added benefit.