Education loan moratorium: the interest before the first EMI

The phase no other loan has

An education loan has two stages. First comes the moratorium: the length of the course plus a grace period, usually six months at public-sector banks and often twelve at private lenders and NBFCs. No EMI is due. Then come the EMIs, typically over five to fifteen years.

"No EMI" is not "no interest". Interest accrues through the whole moratorium, as simple interest on the amount disbursed, which is the concession the moratorium offers. What happens to that interest is a choice, and most borrowers never notice making it. You can pay it as it accrues, or let it capitalise: be added to the principal when the moratorium ends.

A worked example

Take a ₹20 lakh loan at an assumed 10% a year (illustrative, not a quote) for a four-year degree with a six-month grace period, so a 54-month moratorium, followed by 10 years of EMIs. These are the defaults on our education loan EMI calculator, which assumes the whole loan is disbursed on day one.

Interest during the moratorium is ₹20 lakh × 10% × 54 ÷ 12 = ₹9 lakh, or ₹16,667 a month. That is 45% of the loan before the first EMI.

Capitalising costs ₹5.27 lakh more. The reason is easy to see once you split the EMI. The extra ₹11,894 a month is the EMI on the capitalised ₹9 lakh alone, and 120 of those come to ₹14.27 lakh. You repay ₹9 lakh of interest with ₹14.27 lakh, because once it joins the principal it is charged 10% a year like everything else. The front-loading that makes this so costly is explained in how an EMI actually works.

Many banks also cut the rate by half a point to a point for borrowers who pay interest during the course. At 9.5% on the serviced loan the gap widens to ₹5.93 lakh; at 9%, to ₹6.59 lakh. The concession is rarely offered unprompted, so ask.

Course length changes the bill

The accrued interest grows in a straight line with the moratorium, and the cost of capitalising grows with it:

All three assume ₹20 lakh at 10% and a 10-year repayment. Most loans, though, are paid out by semester or by year, and interest runs only on what has been disbursed. If the ₹20 lakh came in four equal yearly instalments, the interest by month 54 would be ₹6 lakh, not ₹9 lakh, and the capitalised EMI ₹34,359. In the calculator you can get the same ₹6 lakh by setting the moratorium to 36 months.

The middle path

If ₹16,667 a month is more than the family can spare during the course, two things still help. Pay what you can: every rupee paid during the moratorium is a rupee that does not capitalise. Or pay the accrued interest as one sum at the end of the moratorium, before the first EMI. Because the interest is simple, a lump sum at the end avoids the compounding just as fully as monthly payments do. Money set aside for it can sit in a liquid fund or a money market fund until the date.

The deduction on interest, under the new Act

Education loan interest has a tax deduction under section 129 of the Income-tax Act 2025, the renumbered section 80E. Our guide to education loans and section 80E covers it in full; the parts that matter here:

• It covers interest only, with no rupee cap, for up to eight years from when repayment starts, or until the interest is paid off if that is sooner.
• The loan must come from a bank or an approved institution, for higher education of yourself, your spouse, your children or a student you are the legal guardian of, and the person claiming must be the one repaying.
• It is an old-regime deduction. On the new regime, the default for FY 2026-27, it is worth nothing. The old vs new regime calculator and our regime comparison for FY 2026-27 show which suits you.

On the old regime, someone in the 30% slab saves at most 31.2% of each rupee of interest deducted, once the 4% cess is counted. That fixes one thing for good: the deduction can never make capitalising the cheaper choice. Capitalising adds a rupee of interest to save at most 31 paise of tax.

The eight-year window matters more than the cap that is not there. With the clock starting at the first EMI, a 10-year repayment leaves only the last two years outside it: ₹89,262 of the capitalised loan's interest. Stretch the same ₹29 lakh over 15 years and the EMI falls to ₹31,164, but ₹7.41 lakh of interest lands after year eight, where nothing is deductible. Note too that the old section 80E counted the eight years from the year the borrower started paying interest, so a student borrower who services interest during the course, with no taxable income yet, may be using up the window. Check how your claim will be counted before relying on it; the Income Tax Department's portal has the current text.

The rule of thumb

Every rupee of moratorium interest you let capitalise costs about ₹1.59 by the end of a 10-year loan at 10%. Pay it as it accrues if you can, in a lump sum before the EMIs if you cannot, and keep the repayment at eight years or less if you are counting on the deduction.

Pitfalls

1. Treating the moratorium as free. On a four-year course it can add close to half the loan before the first EMI.
2. Not asking for the servicing concession. Half a point is worth ₹66,000 on this loan.
3. Choosing the borrower without the tax in mind. The deduction belongs to whoever took the loan and repays it, and only on the old regime. Our post on lesser-known deductions for the salaried lists what else survives on each regime.
4. Forgetting prepayment. RBI's directions bar prepayment charges on floating-rate loans to individuals for non-business purposes sanctioned or renewed from 1 January 2026, so a bonus in the first working years can go straight into the loan. The loan prepayment calculator shows the saving; the directions are on the RBI website.
5. Missed EMIs in the first job. They land on the borrower's credit record at the start of a working life; see how your CIBIL score is calculated.

The cheapest education loan is a smaller one. If the course is years away, the child education calculator and our guide to investing for a child's education show what saving ahead would take, and planning a goal 12 years out runs the numbers.

This post is for education only and is not financial or tax advice. The loan rate is an assumption and lenders' terms differ; verify the deduction's current conditions before you claim it.