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Educational Loan & Tax Liabilities

Can the payment towards educational loan be allowed as deductible expense and does the inheritance of house make one liable for capital gains? Our tax experts provide the answer to this very common query.

1. Educational LoansI have taken a loan from my employer for funding my daughter's medical studies. The repayment of this loan is more than Rs 40,000 a year. Can I deduct Rs 40,000 from my taxable income since repayment of an educational loan is a deductible expense?
Pratap Sahu, Delhi

With higher education becoming more and more expensive, many parents are taking loans to help their children follow professional careers. Unfortunately, even though these loans are undoubtedly educational loans, the law is such that they cannot be used as tax breaks by parents. Section 80E does provide for a deduction of Rs 40,000 for up to eight assessment years, but these deductions are available only when the assessee takes the loan for his or her own education.

You should also note that the criteria for deciding educational courses that qualify are quite rigorous. The assessee must be attending a full time course for any graduate or post graduate course in engineering, medicine, management or for a post graduate course in applied sciences or pure sciences including mathematics and statistics.

2. Inheritability of Tax Liabilities
Last year my father sold our house with the intention of buying another house. At the close of the financial year he deposited the sales proceeds in a bank under the Capital Gains Account Scheme. Unfortunately, he expired this year without actually using this amount. Since I have my own house I do not really need another house. Moreover, I am likely to need the money for my business. I'd like to know if I will be liable to pay tax if I withdraw the money and do not use it to purchase another house. I am the only legal heir to my father.
Javed, Delhi

In general, a legal heir is liable to pay any tax, which the deceased would have been liable to pay if he had not died.

However, you are fortunate that there is a ruling that specifically absolves people who are in the exact situation that you find yourself in. According to circular no. 743 dated 6th May 1996 of the Central Board of Direct Taxes, any unutilized amount under the Capital Gain Account Scheme, in the case of an individual who dies before the expiry of the stipulated period, is not taxable in the hands of either the deceased or his legal heirs.

Therefore, you are free to withdraw any amount from the scheme without having to invest in a new house. This amount will not be taxed and will be treated as a capital receipt.