How Education Loan Interest Works
Understanding the study phase (moratorium) is the most critical part of an education loan:
- Moratorium (Study) Phase: Only Simple Interest is calculated on the amount you have borrowed. No compounding happens during this phase.
- Repayment Phase: Once the grace period ends, the accumulated simple interest from the study phase is added to your original loan amount. Your EMI is then calculated on this new, higher principal using Compound Interest.
- Interest Subsidy benefit: If you service (pay off) the simple interest every month during your study phase, your final EMI will be much lower, and banks typically offer a 1% interest rate concession.
Section 80E Tax Deduction
The interest paid on an education loan is entirely tax-deductible under Section 80E of the Income Tax Act. There is no maximum limit on this deduction! You can claim it for a maximum of 8 consecutive years, starting from the year you begin repaying the interest.
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