The Hindu Business Line : Teach me about education loans

I had taken a loan for my higher education and I pay an interest of Rs 50,000 on the loan. Will the entire interest on the loan qualify for tax deduction? — P. Babu

Section 80E has been amended to provide that with effect from assessment year 2008-09, the deduction will be available in respect of the interest on loan taken for the purpose of the higher education of the individual or his relative and the term relative is defined to mean the spouse and children of the individual.

There is no ceiling limit on the amount that will be eligible for the deduction. This deduction is available for a maximum period of eight assessment years beginning from the year in which the interest is paid.

Therefore, in your case, if the higher education is one which qualifies for deduction under Section 80E and if the loan is taken from a bank or charitable institution the entire amount of Rs 50,000 will qualify for the deduction.

Higher education for the purpose of Section 80-E will mean full time studies for any graduate or post graduate course in engineering, medicine, management or for post graduate courses in applied sciences or pure sciences including mathematics and statistics.

I and my brother are employed and we are planning to buy a house in Mumbai in our joint names. We are also planning to apply for loans separately in our names. Will both of us be eligible for the tax benefits in respect of the loan taken? — Umang

Both your brother and you will be eligible for the tax benefits in respect of the loan taken. The principal repayment of the loan will qualify for the deduction under Section 80-C.

The maximum amount of deduction that can be claimed under Section 80-C is Rs 1 lakh and this Section permits the claim for deduction in respect of certain payments and investments.

The interest payment on loan will qualify for deduction under Section 24. The maximum amount that will qualify for deduction will be Rs 1.5 lakh if the property is self occupied and without any ceiling limit if the property is let out. These limits will be reckoned separately for each of you i.e. your brother and you.

My friend wants to gift me some shares that he had purchased through the NSE, after paying securities transaction tax (STT) during the financial year 2007-08. The market value of the same is around Rs 15 lakh.

He plans to transfer the same to my demat account through off market transaction, without paying STT, before March 2008.

Is my friend liable to pay any capital gains tax on such transfer? Am I required to pay any gift tax since this is not a cash gift? If I sell these shares through the NSE, after paying STT, will the period of holding of my friend be taken into consideration in determining my tax liability on capital gains? — K.V. Manoharan

When your friend gifts the shares to you, there will be no capital gains chargeable to tax in his hands.

This will be so since Section 49 of the Income Tax Act considers a gift not to be a transfer for the purpose of capital gains and a capital gain can arise only when there is the transfer of a capital asset.

Section 56 provides that any sum received without consideration would be treated as income in the hands of the recipient. The Section specifically refers to ‘any sum of money.’ Bearing this language in mind, it is clear that the Section gets attracted only when a sum of money is received.

The term money by itself can mean a currency or a medium of exchange and can encompass assets as well.

However, the use of the words ‘any sum’ before the use of the word ‘money’ makes it clear that only where cash or cheques or drafts etc are received, the Section will get attracted.

Understood in this sense it will be clear that assets are outside the purview of a charge under this provision. Therefore, the transfer of shares by way of gift without consideration cannot be treated as income in the hands of the recipient since shares cannot fall within the meaning of the term ‘any sum of money.’

On the sale of the shares that are gifted by your friend to you, the period of holding will also include the period for which the shares were held by your friend before the same was gifted to you.

This is provided for in Section 2(42A) of the Act. If including the period for which the shares were held by your friend the shares have been held for a period exceeding 12 months, the gain will be long-term and would be exempt under Section 10(38).

If on the other hand, if including the period for which the shares were held by your friend, the period of holding does not exceed 12 months the gain will be a short term and would be taxed at 10 per cent (as increased by the appropriate surcharge and additional surcharge) as provided for in Section 111A.

You may note that this tax treatment in respect of capital gains will apply only where securities transaction tax is paid at the time of sale of the shares.

I took a loan from the bank to pay for the post graduation course of my brother.

I also pay EMI out of my salary for the loan taken. Will I be eligible for any tax benefit? — Mudda Mallikarjun

No tax benefit can be claimed by you since the deduction under Section 80-E can be availed of only in a case where the loan is taken for the higher education of an individual or his relative and the term relative is defined to mean the spouse and children of the individual.

Since your brother does not fall within the meaning of the term relative for the purpose of this Section, no tax benefit can be availed of by you.

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