Break investments or take loan for son's education?

These are a set of queries about educational funding raised by ET Wealth readers, answered by our panel of experts. A 48-year-old individual is contemplating whether to sell investments or take an education loan to cover their son's MBBS tuition, which costs around Rs 21 lakh annually for five years. The person is in the 30% tax bracket with substantial savings, 90% of which are in equity. The decision hinges on whether the investments are earmarked for education or another purpose.

If the investments are for education, they can be systematically redeemed to cover the fees. If they are for a different goal, such as retirement, a full loan might be taken if the income is stable enough to service it, or the costs can be split between the investment portfolio and a loan. Selling equity funds incurs a Long-Term Capital Gains (LTCG) tax of 12.5% above a Rs 1.25 lakh annual exemption (20% if held for less than a year).

Withdrawing in tranches matching each year's fee can help utilize the exemption up to Rs 6.25 lakh, reducing the tax burden.

Education loans typically charge between 9-11%. Under Section 80E of the Income Tax Act, interest on these loans is fully tax-deductible for up to eight years, but only under the old tax regime. At a 30% tax rate plus cess, the effective loan cost drops to approximately 6.2-7.6%. With a stable and growing income, borrowing can be more tax-efficient.

A 10-year-old is planning to pursue studies in the UK after Class 12. Starting from next year, they will work part-time to earn between Rs 15,000-20,000 monthly and will have prize money savings. The estimated educational cost is Rs 24 lakh plus modest living expenses. To prepare financially over the next three years, a systematic investment plan (SIP) in debt mutual funds is recommended, given the short time horizon and potential market volatility.

By saving Rs 18,000 monthly for two years, one could accumulate around Rs 4.6 lakh. An education loan can cover the remaining gap, and savings from prize money should also be invested similarly. Setting aside 6-8 months of essential expenses as contingency funds is also advised.