Education loans taken from non-banking financial companies (NBFCs) may not qualify for a tax deduction under Section 80E of the Income Tax Act of India. For a borrower to avail of the tax benefit, the financial institution must be notified by the Central Board of Direct Taxes (CBDT).
For instance, tax exemption can only be availed on loans from banks and HDFC Credila.
So, borrowers should be aware of this aspect when planning their loan application, as this can have a significant impact on the effective interest rate of the loan, particularly if the applicant or the co-applicant is in the highest income-earning bracket, said Ankit Mehra, CEO and founder, Gyandhan in interaction with CNBC-TV18.
So, does it still make sense to take these loans from NBFCs?
Well, the direct answer to this is that If it's only about minimizing finance costs then banks are a better option, said Aditya Damani, founder at Credit Fair.
"But one should look at this problem through a narrow lens," he said.
Elaborating further, Mehra of Gyandhan said NBFCs continue to increasingly capture a larger share of the education loan industry driven by their focus on convenience and flexibility.
"This is because they offer loans without collateral and also are more flexible in loan terms when compared to banks which makes their offering more compelling to the end consumer," he said.
Banks, on the other hand, ask for collaterals, which for many families is difficult to arrange.
"So that’s when NBFCs come in, as they provide unsecured loans, where the turnaround time is a few days with fewer documents and a customer-friendly process. We also need to understand that this phase in any student's life is stressful for them and their families; following long procedures and managing huge paperwork is difficult. Wherein with NBFCs, it is simpler to get unsecured high limits," Damani told CNBC-TV18.
Also, there are number of students and professionals that are focusing on online education for higher studies these days. A lot of these courses have been taken by professionals and students but unfortunately, they are not being able to avail tax benefits as only NBFCs are able to serve this segment.
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(Edited by : Jomy Jos Pullokaran)