See the interest that builds up while you study, and compare paying it as you go with adding it to the loan before EMIs start.
With most loans the EMI starts the month after the money is paid out. An education loan usually gives you a moratorium instead: no EMI during the course and for a short grace period after it, so you can finish your studies and find a job first. Interest does not stop during that time, though. This calculator measures how much interest builds up over the moratorium and shows what happens to your EMI and your total repayment depending on whether you pay that interest as it falls due or let it be added to the loan.
Interest during the moratorium is simple interest: I = P x R / 100 x M / 12, where P is the loan, R the yearly rate and M the moratorium in months. In option A you pay I / M every month while studying, and the EMI is then worked out on the original P. In option B the interest is added, so the EMI is worked out on P + I. In both cases EMI = L x r x (1 + r)^n / ((1 + r)^n - 1), with L the loan at the start of repayment, r the yearly rate divided by 1,200 and n the repayment months.
Say you borrow ₹10,00,000 at 10% for a 24 month course with a 6 month grace period, and plan to repay over 10 years. The moratorium is 30 months, so the interest that builds up is ₹10,00,000 x 10% x 30 / 12 = ₹2,50,000.
Under option A you pay about ₹8,333 a month for those 30 months, then an EMI of ₹13,215 for 120 months. Everything together comes to ₹18,35,809. Under option B the loan is ₹12,50,000 when repayment starts, the EMI is ₹16,519, and you repay ₹19,82,261 in all. Letting the interest pile up costs ₹1,46,452 more in total, because from the first EMI onwards you are paying interest on that ₹2,50,000 of interest as well.
The Income Tax Department lists Section 80E as a deduction for an individual on interest paid on a loan for the higher education of self or a relative, and gives the limit as the total amount paid towards interest on the loan. The deduction can be claimed for the year in which you start paying interest and the seven years after it, so eight years at most, or until the interest is fully paid if that comes sooner. It is a deduction under the old tax regime; it is not on the list of deductions allowed in the new regime. The loan has to come from a bank, a financial institution or an approved charitable institution. The yearly table above shows the interest in each repayment year, which is the amount that matters for the claim. Check the current rules on incometax.gov.in before you file.
