Sajjad Bazaz
Believe it or not! The Covid-induced pandemic has given a big push to education loans. The demand for education loans during the pandemic rose to a record level when most of the educational institutions in India and across the world remained physically shut and were forced to conduct classes online.
A credit bureau data for 12 months through September 2020 reveals that banks and financial institutions disbursed Rs 11,000 crore loans and a major portion of the disbursals happened through the pandemic period with more than 3 lakh new borrowers signing up for loans between March and October 2020.
The data further reveals that as of October 2020, the outstanding education loans totalled Rs 1.02 lakh crore, the highest on record. Notably, there has been a 35% increase in the applications for overseas courses as an increased number of people wanted to enroll for foreign institutions which ran most part of the year in the hybrid mode.
So, amid ongoing covid crisis, when the Omicron variant of the virus has almost signaled its third wave, the education loan market has emerged as one of the fastest growing markets for the banks. The rising cost of education has already led to the growing need for finance for education and the virus has almost doubled the demand. With liberal financing from the banks, today financial resource crunch does not stave off the middle class students from higher/ professional education. Students can pursue any expensive courses anywhere in the world.
Meanwhile, there are several queries from some readers who are intending to send their wards outside country for pursuing professional courses. Firstly, they have sought some guidelines for obtaining education loan for studies abroad. Secondly, they have expressed apprehensions that they would be taxed for education-related foreign remittances which are even funded by loans.
Basically, with the introduction of the amended Finance Bill 2020, all foreign spending attracts a TCS (tax collected at source) including studying abroad. The tax implication has come into effect from October 1, 2020. The tax collection on such remittances comes under the Reserve Bank of India’s (RBI’s) Liberalised Remittance Scheme (LRS).
Notably, under this tax reform, money exceeding the permissible limit will not attract any TCS if the transaction has been done before October 1, 2020. All transactions on and after October 1, 2020, would attract TCS.
What are the important parameters of the TCS on foreign remittances?
A tax of 5% is applicable on an amount in excess to INR 7 Lakh in a financial year (not on the total amount).
The new provision of the TCS is effective from October 01, 2020. Although the rule is effective from 01 October 2020, this exemption limit is applicable for the current financial year, i.e., 01 April 2020 till 31 March 2021.
If the amount is remitted for abroad education purposes through an education loan from any authorized financial institution, the TCS on foreign remittance for education shall be 0.5% on the amount more than INR 7 lakhs.
The TCS will be collected at the time of receipt of the amount, or while debiting the amount payable whichever is earlier.
The TCS rates are to be increased by an applicable surcharge and Health & Education Cess if the remitter is a non-resident as per the Income-Tax Act, 1961.
If the remitter does not furnish his/her PAN details, the TCS will be 10% instead of 5%.
GST will not be applicable to the TCS amount.
The TCS will be reflected as a tax credit in Form 26AS. Therefore, the amount of TCS can be claimed as a credit against tax payable while filing the ITR. If the TCS is higher than your payable tax, you will get a refund.
How the TCS rules impact education loans for studies abroad?
Only 0.5% TCS will be applicable to the transfer amount of more than Rs.7 lakh if the educational expense is financed through an education loan. However, if the educational funds are not arranged through an education loan, a 5% tax on the amount transferred above Rs.7 lakh will be deducted. Remarkably, new TCS rules have made taking an education loan to study abroad preferable and economical for students and parents.
Are there any exceptions on TCS?
• No TCS will be collected from the buyers in case the seller has already collected the tax.
• No TCS will be collected on the amount paid i.e. if the amount is already liable to TDS under any other provision of income tax.
• No TCS will be collected in case of remittances from the State Government, Central Government, or any embassies.
• For self-employed remitters can adjust other tax liabilities or can get a refund of it.
How to claim the tax refund?
Even as it has raised the upfront cost of foreign education and travel, even though the following tax can be claimed as a refund while filing the income tax return:
Experts say that the money being sent by the remitter person can claim for a tax refund but in the case of an education loan, the scenario changes as the co-applicant can claim for a refund. This is because, during the time of amount disbursement, the co-applicant has to sign the LRS.
So, adjust the TCS amount towards your other tax liabilities. If you’re unable to adjust the TCS amount, you can claim a refund to your account directly. Don’t forget to obtain a TCS certificate from the financial institution or the Company who collected the tax. The salaried employees can provide the certificate of TCS to their employer, as it will help them claim the refund during the time of annual tax filing.
What are the most important things to keep in mind for a student borrower?
The most important thing for a student borrower is not to default. They should use the grace period, typically up to 12 months after completion of course or six months after getting employment, whichever is earlier, given by the banks to plan some part repayment. A default spoils the credit score of both the student and his parents (usually co-borrower). If equated monthly installments are overdue for 90 days, the bank classifies the loan as a non-performing asset (NPA). The borrowers will not only come in the bad books of banks, if the loan amount is higher than Rs 7.5 lakh, the collateral will be at risk as well. So have a repayment strategy in place before EMIs start.
Normally banks are more sympathetic towards borrowers in the education loan segment because more often than not, the reason for the default in loan repayment is not willful. So don’t hesitate to share your difficulties with the bank. May be they get convinced to reschedule your loan repayment or may be the bank would be tailoring a financial solution to get you out of the financial mess.
If possible, do not take the entire loan in one go but in installments. This will reduce the interest burden.
Try to build a corpus during the moratorium period which you can later use to service your loan account. And at the same time explore to pay interest portion to lower EMIs. Otherwise mounting interest amounts would increase your debt burden. Many banks also give a 1 percent interest concession to those who repay the interest during the moratorium period. It would be in the fitness of things not to wait for the right job. When you are debt-laden, having a job in hand is better than not having one. Simultaneously continue hunting for a suitable job. Make sure to save for rainy day and invest a part of your income for future goals.
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author. The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK