How to fund child’s education: Take a loan or use own funds?

Keeping your accumulated savings invested and taking an education loan instead can benefit you. Photo: Alamy

Keeping your accumulated savings invested and taking an education loan instead can benefit you. Photo: Alamy

Any big-ticket spending requires you to either have the required funds in place or a financing option. When dealing with long-term financial goals, such as higher education of children, you have the advantage of planning much in advance. Here’s how you can go about the planning.

Start early

A lot of parents have an inclination to send their children abroad for higher education, at least at the post-graduate level, said Suresh Sadagopan, a certified financial planner and founder of Ladder 7 Financial Advisories. “In that case, the planning needs to start really early. They would need a horizon of at least 10-15 years. When we talk of international education at post-graduate level today, most likely it is not going to happen below ₹40 lakh,” he said.

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How do you work towards saving that amount? Prakash Praharaj, founder, Max Secure Financial Planners, said that the future cost of a particular course needs to be calculated taking into account at least 10% annual inflation. “Then calculate the current assets and investments accumulated for these goals. Then the remaining gap for the aimed amount is to be filled through monthly SIPs over the years,” he said.

Starting an SIP of ₹5,000-7,000 in an equity fund for 15 years and increasing it by 10-20% each year could help. However, Sadagopan said, given the fact that there are so many ongoing expenses these days, including other loans, it becomes difficult for parents to put aside a huge amount for the child’s post-graduation alone.

Consider taking loan

Even if you have been working on creating a higher education corpus, you need to consider taking an education loan. At present, the total expenses for higher education abroad could be in the range of ₹1 crore per child, Sadagopan said.

“A realistic thing that parents need to realise is that the child’s higher education is not their only goal. Retirement is also an important goal and they need to be aware of the fact that you can get a loan for all other requirements but not for retirement,” he said.

Own funds versus loan

But if someone has already accumulated the required amount, why should another repayment burden be taken on? The answer lies in two things, Praharaj said. “A cost benefit analysis suggests that taking an education loan and keeping the accumulated amount invested works in your favour. Moreover, it also helps in developing a sense of responsibility in the student. The realisation that a repayment has to be done by them keeps them focussed,” he said.

The math of keeping your accumulated savings invested and taking an education loan instead suggests that taking a loan results in significant benefits. For instance, if ₹1 crore is kept invested and an education loan for the same amount is taken, at the end of nine years, including the repayment holiday on the education loan, the net benefit could be around ₹87 lakh (see graph).

This includes the tax saved on repayment of loan. Borrowers of education loans can claim deduction on the interest paid, though not on the principal amount. Also, unlike in home loans, there is no limit to the amount that can be claimed as deduction.

Sadagopan said it is better that the parents keep the money with themselves and let the child take the loan. “In future if the child is struggling to find a job and pay back, you can step in to help at that point,” he said.


Find out all About Debt Consolidation Loan in One Go

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Debt consolidation includes borrowing a sum of money from a lower interest lender to clear out your debt with the higher interest lenders. With this movement, you can get rid of high interest debt and just be left with an easy to manage, lower interest loan!

Why should you consolidate?

Opting for another loan appears like the last option that a debtor would want to do, but there are two amazing reasons why you should consolidate your debt:

  • Pay lower interest and get debt free faster

Who hasn’t heard of the stats, and it goes like this: if you have a credit card debt of $10,000 with an 18% rate of interest and you can only pay a minimum of $200 per month, then only $46 of the money is going towards the principal and the rest $154 is spent on the interest. This way you’ll end up paying $9261 as interest in eight years…!

But with debt consolidation, you can easily opt for a consolidation loan of $10000 at an interest rate of 9.5% and use it to clear your credit card arrears. And this way you can pay your loan in a period of 5 years or so with $2700 of interest in total.

  • Ease your planning and payouts

If you’re under debt of different lenders, then it may be difficult to keep a track of different due dates and payment amount. In fact, you cannot easily track your progress also. But, with consolidation of debt, you only have to pay for one loan and just have one account to track. Thus, it is a simple and easy to handle repayment plan.

With debt consolidation, you can efficiently monitor your spending habits. You can prepare a budget and make use of money management tools to control your extra expenses. Talking about budget, you also need to have a good strategy to cover your expenditures without switching to credit card or greater interest loans. A low rate loan plan will help you get rid of your credit card outstanding, but if you do not control your expenses, you’ll be back at the starting point along with an extra loan amount on your head.

Debt consolidation is more like an instrument, not a full-fledged solution. One needs to use it cautiously and save thousands of dollars in interest every year. It can serve as a great method by allowing the debtor to get a perfect grip on debt and loan, but with cautious steps. As a borrower, one needs to be very clear about the advantages that it will render in comparison to the present loan structure and you surely need to do calculate it well. What is even more important is debt consolidation loan shouldn’t be taken as a license to go for additional debt. The purpose of the loan is to lower down the pressure of your unpaid arrears; you shouldn’t end up taking new debt. It will lead to a dicey condition and eventually more fiscal distress.

India Funding Roundup: An Online Legal Services Provider, Loan Marketplace, and More

India Funding Roundup: An Online Legal Services Provider, Loan Marketplace, and More

Our latest funding roundup compiles seed stage investments in Indian subscription based grocery delivery startups, legal services providers, loan application portals, and proximity marketing firms.

Noida-based Deal4Loans, a loan information and application portal that provides information on personal, home, car and business loans, and credit cards from different banks has raised an undisclosed amount of funding from international investors, including Ram Shriram, Neeraj Arora, Samir Sood, and Puru Vashishtha. Founded in 2009, the company has reportedly booked over Rs. 10,000 crores in loans through seven million customers.

Online legal service provider LegalRaasta has reportedly raised Rs. 6.5 crores in an angel round from Praveen Khandelwal and Yatin Kumar. Founded in 2015 by siblings Himanshu Jain and Pulkit Jain, the startup helps with company formation, trademark, and filing of IT returns, and offers a door step services with a 30-day money back guarantee.

Pune-based Raincan, a subscription-based grocery delivery startup has reportedly raised an additional angel funding of Rs. 1 crore from existing investors and Aniruddha Malpani. Founded in 2015, the startup provides an app for Android users, and delivers items such as dairy, meat, bakery, fruits and vegetables.

Mumbai-based proximity marketing firm BeaconsTalk has reportedly raised under $100,000 (Rs. 66 lakhs) in a pre-Series A round of funding. The startup has deployed 1,500 sensors and plans to grow to around 10,000 sensors by October.

Actor Anil Kapoor has reportedly invested an undisclosed sum in, a California-based video social network, and now appears in a promotional video on the website’s homepage. The platform was founded by Neel Grover and Greg Giraudi in 2013, and plans to launch in India on April 28.

Download the Gadgets 360 app for Android and iOS to stay up to date with the latest tech news, product reviews, and exclusive deals on the popular mobiles.

Tags: Apps, BeaconsTalk, Deal4Loans, Funding, Indi, India, Internet, Investment, LegalRaasta, RainCan, Startups

Wrong Tax Deduction on Home Loan Can Result in Tax Penalties

Wrong Tax Deduction on Home Loan Can Result in Tax PenaltiesThe purchase of a house, by taking out a home loan, is considered good by personal finance experts, who generally scoff at long-term liabilities.

A house, unlike other personal goods such as cars, is considered to be an asset. There’s tax benefit too. Home buyers can claim an exemption of up to Rs. 1.50 lakh on principal payments for home loan under Section 80C of the Income Tax Act.

Buyers can avail Rs. 2 lakh deduction paid towards interest component of home loan per year.

The above-mentioned benefits apply for self-occupied properties and not for under construction houses. Further, in case of a delayed possession, the tax benefits get reduced substantially. Many a times, tax payers – unaware of this provision – claim full tax benefits on their home loan and get notices from the tax department.

According to Section 24B of Income Tax Act, a person can claim a tax deduction of up to Rs. 2 lakh on the interest paid on a self-occupied house if the possession of the property is done within three years of taking the loan.

In case the possession is given after three years, then the amount of deduction is reduced to Rs. 30,000 per year.

This means in case of delayed possession (when houses are delivered three years after a home loan has been taken), buyers can claim only Rs. 30,000 (15 per cent of the current allowed deduction of Rs. 2 lakh) as exemption.

Those who unknowingly claim exemption can get into serious trouble and may have to pay huge penalties, experts say.

“If the home buyer in such cases still claims interest of Rs. 2 lakh per annum, the tax office could disallow the deduction of Rs. 1.7 lakh per annum which could result in additional tax and interest payable by the home buyer to the tax office. At their discretion the tax office can also levy penalty for claiming excessive deduction,” says Parizad Sirwalla, National Head-Global Mobility Services-Tax, KPMG.

The penalty in this case may range between 100 per cent and 300 per cent of the extra tax deductions claimed, says Amit Maheshwari, managing partner of Ashok Maheshwary & Associates.

Tax experts say that home buyers are getting tax notices for claiming over Rs. 30,000 deduction, despite delayed possession. “As people are getting the possession of the house which they booked five to seven years back now, tax department are scrutinising the returns and people are getting notices from the tax department for the same,” says Sudhir Kaushik, chief financial officer,

Tax experts believe that Finance Minister Arun Jaitley in the budget should relook at the tax benefits offered on home loans. “It may be worthwhile to consider an amendment in the provision not limiting such deduction to Rs. 30,000 per annum in cases where the delay in completion of construction is caused on account of reasons beyond the control of the home buyer,” says Parizad of KPMG.

Tapati Ghosh, partner at Deloitte Haskins & Sells, said: “One of the measures that could be considered is the extension of time limit to 5 years at least for the under-construction properties.”