Is it worth taking out a student loan to study abroad?

Generally, when planning your finances for your child’s education abroad, you need to consider many types of expenses, including tuition, accommodation costs, necessities such as laptops, books, coaching fees, etc.

The student loan comes with two main tax advantages that you should be aware of. One is the tax deduction under Section 80E of the Income Tax (IT) Act, and the second is a Withholding Tax Concession (TCS).

Article 80E of the IT law: Student loans applied by banks and certain non-bank financial companies (NBFCs) are eligible for tax deduction under this section. Interest paid on student loan repayment is allowed as a deduction from total income. Although the deduction is only allowed on interest paid on a student loan, there is no cap on the amount allowed as a deduction.

CDS: The 2020 Finance Act introduced Section 206C(1G) under the Income Tax Act, which imposes a 5% CST on foreign remittances exceeding 7 lakh in a financial year. Ankit Mehra, Founder and CEO of GyanDhan, said, “The TCS applicable to education fees arranged with an education loan is only 0.5%. This means that if a student obtained funds for their education from a source other than a loan, the tax on the amount that exceeds The 7 lakh cap would be 5%. This effectively makes obtaining funds for education abroad through a student loan cheaper and an easy choice.”

For example, if the student spent overall 20 lakh to study abroad for one year, TCS would be applied on 13 lakh at 5% under the new rule, meaning he could not get a loan from any financial institution. In this way, he would have paid more 65000 taxes to the government. However, if the student had obtained the same amount through a student loan from a financial institution, the amount exceeding the authorized limit would have been taxed at 0.5%. In this case, he would have paid only 6500.

Instilling Financial Prudence: The student must manage their expenses and plan how much they want to spend and save to repay the loan. Since repayment begins after the course period ends, they have plenty of time to figure out their repayment plans. Taking out a loan is a good approach to instilling prudent financial habits.

Building a credit history: Taking out a student loan is a great start to building a credit history that helps you apply for credit later in life. Mehra said: “Timely repayments will result in a high credit rating reflecting responsible credit behavior. This increases their financial credibility and their chances of getting better terms and lower interest rates on home loans and other forms of credit.

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