The upcoming Union Budget 2026–27, to be presented on February 1 by Finance Minister Nirmala Sitharaman, is raising hopes among homebuyers—especially those using the old tax regime—that the government may increase the tax deduction on home loan interest to Rs 5 lakh. The demand has gained traction as rising property prices and larger loan sizes have made existing limits less effective.
Why the old tax regime matters for homebuyers
Home loan tax benefits are far more generous under the old tax regime. Borrowers can claim deductions on principal repayment under Section 80C (up to Rs 1.5 lakh), interest paid on self-occupied homes under Section 24(b) (up to Rs 2 lakh), and additional interest benefits for first-time buyers under Sections 80EE and 80EEA, subject to conditions. Joint owners can also claim these benefits individually.
In contrast, the new tax regime offers minimal relief. Deductions under Sections 80C, 80EE and 80EEA are not available, and interest deduction under Section 24(b) is allowed only for let-out properties, limited to rental income and without set-off against salary income. This makes the old regime more attractive for borrowers seeking meaningful tax savings on home loans.
Affordable housing under pressure
According to Knight Frank India, the affordable housing segment has been losing momentum. The share of homes priced up to Rs 50 lakh in overall sales has fallen sharply—from 54% in 2018 to just 21% in 2025. Even as overall housing sales stayed stable, affordable housing sales declined 17% year-on-year in 2025.
The report points to rising home prices, lower disposable incomes and limited access to formal credit as key reasons behind the slowdown. Buyers in this segment are the most sensitive to affordability pressures.
Case for raising the interest deduction limit
To revive demand, Knight Frank has recommended increasing the maximum deduction on home loan interest under Section 24(b) from the current Rs 2 lakh to Rs 5 lakh. The idea is to make home purchases more tax-efficient, particularly for affordable and mid-income buyers, at a time when EMIs have risen and loan sizes have expanded.
The consultancy also flags limitations under PMAY 2.0, where benefits are capped at homes valued up to Rs 35 lakh. In major cities, where prices are significantly higher, this threshold often excludes genuine end-users. Knight Frank suggests raising the house value cap to Rs 75 lakh in large urban centres to better reflect market realities.
Shishir Baijal, International Partner, Chairman and Managing Director, Knight Frank India, said, “With the Union Budget for FY 2027 approaching, the housing sector requires focused intervention to address growing structural imbalances. While residential markets have shown resilience, affordable housing continues to underperform due to declining affordability, elevated input costs, and limited end-user support.”
He added, “There is a strong need to realign housing incentives with today’s urban cost structures, particularly in major cities where price thresholds no longer reflect market realities.”
What experts are saying
Vikas Bhasin, Managing Director, Saya Group, said, “Since a majority of homebuyers rely on housing loans to fund their purchases, there is a strong case for enhancing the income-tax deduction on home loan interest. With property prices and average loan sizes having increased substantially over the years, the current limits are no longer aligned with market realities. Increasing the deduction to at least ₹5 lakh would provide meaningful relief to buyers, improve EMI affordability, and give a sustained boost to genuine end-user demand across markets.”
Demand beyond metro cities
Ankit Kansal, Founder and MD, Axon Developers, said, “Budget 2026 comes at a time when housing demand is expanding beyond primary residences into second homes, particularly in Tier II and III cities, where lifestyle-led living and remote work are reshaping buyer preferences.”
He added that revisiting tax deductions and income limits, along with supportive interest-rate signals and faster approvals, would be key to sustaining this momentum.
Summing up…
With affordability under strain and the old tax regime still preferred by many home loan borrowers, raising the Section 24(b) interest deduction to Rs 5 lakh could offer meaningful relief. Whether Budget 2026 delivers on this expectation will be closely watched by homebuyers and the real estate sector alike.