Planning to study abroad is a thrilling venture, and securing an overseas education loan with a lower interest rate and processing fees is a crucial step. But the journey doesn’t end here. In fact, it is just the beginning of a financial maze where strategic decisions can lead to significant long-term savings. In this article, we are here to guide you to maximize your savings after securing your education loan for abroad studies.
For better understanding we will break down the complexities of repayment of student loans for studying abroad, going beyond just interest rates. Exploring factors like TCS on foreign remittance taxes, the twists and turns of tax policies (especially Section 80E for tax exemptions), Loan transfer, and smart moves for repayment. Thus, join us in this voyage of exploring the tips to help you not just settle, but thrive after opting for an overseas education loan.
Understanding the complexities of Tax Collection at Source (TCS) on foreign remittance is essential for students financing their overseas education. Foreign remittance is the transfer of funds from a foreign country to one's home country and plays a significant role in contributing to the economic growth of the receiving nation. The process falls under the Liberalised Remittance Scheme (LRS), allowing for remittances up to Rs 7 lakh for education without incurring TCS charges.
For ease of understanding let us take an example, assume you're planning to send 15 lakhs abroad for your studies. The first 7 lakhs are exempt from taxes, so you're left with 8 lakhs to consider. If you're self-funding, you'll pay 5% tax on the amount exceeding 7 lakhs, which in this case is 5% of 1 lakh, equaling INR 5,000. However, if you've taken an education loan, your tax liability drops to 0.5%, resulting in just INR 500 in taxes. Thus, you can save money on taxes if you opt for an overseas education loan rather than self-funding
Imagine you've boarded an abroad education journey, securing the financial support you need. The intriguing twist? The interest you thoroughly repay on your education loan can serve as a golden ticket to tax deductions under Section 80E. It's not merely about financing your education it is about turning those repayments into a strategic move for financial flexibility. For more clarity on this, you can search for some of the best online loan services for studying abroad, before that let us take a quick example to understand the basics.
Imagine your brother, with a taxable income of 15 lakhs annually, falls into the 25% tax bracket for the year 2023-2024, which makes him accountable for 3.75 lakhs in taxes each year. Imagine enlisting him as a co-applicant for your education loan. This time, you opt for an education loan of 50 lakhs for your masters studies spanning 2 years, locking in a slightly zesty interest rate of 12%.
At this rate, your annual interest payment amounts to 6 lakhs, gradually tapering off over the years. Now, enter Section 80E, and the entire 6 lakhs in interest becomes tax-free. Imagine this, out of your brother’s taxable income of 15 lakhs, these 6 lakhs can be sliced away, reducing his taxable income to 9 lakhs. The tax payable now stands at a mere 90K with a jaw-dropping saving of 2.85 lakhs each year. Thus, it is not just an education loan, it's a tax-saving adventure with a twist.
There are many students who are unaware of the prospective savings through education loan transfer. Basically, it is transferring your student loan from one lender to another. In most cases, loan applications prefer to transfer their loans due to higher interest rates, unresponsive staff, unfriendly repayment policy, etc. Thus, you can transfer the outstanding loan amount to another lender offering a better interest rate. Imagine you have a current outstanding education loan of 60 lakhs, and your monthly EMI is 70K. As you make the payment, let's say 40K goes to interest, and the remaining 30K cuts away at the principal. Starting the next month, your principal drops to 59,70,000, and the interest is recalculated.
This continues with the interest portion decreasing over time, paving the way for a gradual reduction of the principal amount reaching nil. Contrary to a common misconception, the interest already paid to the initial lender need not be paid again. The outstanding amount is considered a fresh loan every month, and the interest portion gradually reduces over time. By transferring to a lower-interest lender, the interest portion diminishes faster, facilitating quicker repayment and substantial savings.
There are other strategies as well to save your money after taking an overseas education loan, that as part-payment and pre-closure policies. Part-payment involves paying a substantial amount to reduce the principal, and while some lenders have a 6-month lock-in period, others allow part-payment from the next month. Pre-closure, as the name suggests closing the loan before the repayment tenure, is similar to part-payment but involves paying the entire loan amount at once. Knowing the policies beforehand helps in strategic planning, minimizing interest paid, and maximizing savings.
There are numerous scholarships to study abroad for Indian students, but due to its competitive nature, it might not become everyone’s cup of tea. Taking education loans not only helps you fund your education abroad and live your dream but also brings a lot of benefits. Each decision you make post-loan sanction contributes to the financial narrative of your educational journey. Remember, informed decisions today can lead to significant savings tomorrow. And for that, we are here to help you by contributing our expert guidance. Thus, reach out to our team at ELAN Overseas Education Loan. Our loan experts provide end-to-end assistance with providing invaluable insights and ensure you get the best deal.
So, connect with us now.