Mangesh Zope
Email: mangesh@peaceful-loans.com
Many people ask why a wealthy family would need an education loan; they have the money to fund this.
The answer is simple: They are financially savvy and make smart non -emotional money decisions.
Maximizing Tax Savings and Lower-Cost Capital for Education Loans Abroad
For High Net-Worth Individuals (HNIs) and wealthy families looking to send their children abroad for higher education, education loans present an opportunity to optimize both tax savings (Section 80E) and
Arbitrage builds wealth: Lower cost of capital post income tax benefits vs. the IRR at which their investments are growing is the arbitrage that allows them to build wealth.
Income Tax Saving: Section 80E benefits ensure they save 30%+ tax on interest paid on education loans for eight financial years. This is as good as having a 30%+ discount on interest rates ranging from 9.25% to 11.5%.
TCS: Like GST, TCS applies to sending money abroad for education(5%) and living expenses (20%). Both come down to 0.5% in case the funding is done via education loans.
Tax Savings Opportunities
Education loans for studying abroad offer significant tax benefits under Section 80E of the Income Tax Act in India. Interest paid on loans taken for foreign education qualifies for tax deduction, reducing the overall tax burden. These deductions, available for up to eight years, allow wealthy families to minimize their taxable income while supporting their children's global educational aspirations.
Lower Cost of Capital vs. Income IRR
HNIs often have access to alternative funding options, such as private wealth management tools or personal capital. However, taking an education loan for overseas studies can be more cost-effective than liquidating assets or diverting personal funds, particularly considering the interest rates on such loans. Compared to the internal rate of return (IRR) on their income and investments, the cost of education loans is relatively low. This makes loans a viable option for preserving liquidity and optimizing capital efficiency.
TCS and Its Impact
A crucial consideration for wealthy families funding overseas education is the Tax Collected at Source (TCS) on foreign remittances. While TCS is a cost incurred when remitting funds, it can be adjusted against final tax liability. Understanding TCS rates and compliance ensures that these families can plan their financial strategies effectively and avoid unnecessary tax burdens.
In conclusion, wealthy families can efficiently finance their children's education abroad by leveraging education loans, tax benefits, and understanding the nuances of TCS while maintaining financial flexibility and optimizing capital costs.
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