Budget 2025: Finance Minister Nirmala Sitharaman is expected to present the second full-fledged budget of the Modi 3.0 government on February 1. Among various sectors and groups, taxpayers have also sought some relief from the government, considering that they have not seen any major changes as far as tax structures and slabs are concerned. Among the major demands from taxpayers and tax experts, one is about introducing some deduction benefits for home loan borrowers who have opted for the New Tax Regime.
Of late, it can be seen that the government wants to see more and more taxpayers coming under the New Tax Regime, eliminating several deductions that could otherwise help reduce their total tax liability.
However, one significant deduction that is discouraging many taxpayers from switching to the new tax regime is the home loan interest deduction.
What does Old Tax Regime offer to home loan borrowers?
Under the old tax regime, salaried employees can claim a deduction of up to Rs 2 lakh on the interest paid for a home loan on self-occupied property. However, this benefit is not available under the new tax regime.
Also read: Joint Taxation: Can a husband and wife club income tax liability, file a single ITR in India?
The Institute of Chartered Accountants of India (ICAI) has recently made three key recommendations concerning the taxation of income from house property under the new tax regime:
- A deduction of up to Rs 2 lakh on home loan interest under the new tax regime.
- Taxpayers should be allowed to set off losses from house property against income from other heads.
- In cases where there is no income under any other head, the loss should be eligible for carry forward, allowing it to be set off against income from house property for the next eight assessment years.
Old Tax Regime: Deduction benefits for home loan borrowers
Under the old tax regime, deductions are available without restrictions, but the new tax regime curtails these benefits. Explaining the current framework, CA (Dr.) Suresh Surana stated, “Under the current framework, Section 24 of the Income-tax Act, 1961 permits a deduction of up to Rs 2 lakh for interest on home loans for self-occupied property, but this benefit is only available under the old tax regime.
Taxpayers opting for the default new tax regime under Section 115BAC are unable to claim this deduction. Furthermore, losses under the head ‘income from house property’ cannot be set off against other income or carried forward for future adjustment under the new regime.”
This limitation disproportionately affects taxpayers in the middle-income group, especially those who rely on housing loans for property purchases. Highlighting the issue, Surana added, “Housing loan interest often exceeds any rental income earned, creating financial stress for these taxpayers.”
A home loan EMI consists of two parts: principal repayment and interest payment. Under the old tax regime, taxpayers can claim deductions for these components as follows:
| Section | Nature of Tax Deduction | Maximum Deduction (INR) |
| Section 80C | Tax Deduction on Principal Repayment | Up to Rs 1,50,000 |
| Section 24(b) | Tax Deduction on Interest Paid | Up to Rs. 2,00,000 |
Recognising the gap, the ICAI has recommended amendments to bridge the disparity. According to Surana, “Thus, ICAI has proposed an amendment to allow a home loan interest deduction of up to Rs 2 lakh under the new tax regime, along with the set-off of house property losses against other income and the carry-forward of unabsorbed losses for 8 years, which would provide substantial relief. It would also promote home ownership alongside supporting real estate investments.”
Additionally, these proposed measures would ease tax compliance and encourage more taxpayers to opt for the new tax regime. As Surana explained, “The proposed measure would simplify tax compliance and encourage more taxpayers to adopt the new regime, contributing to economic growth and increasing government revenues.”
These amendments, if implemented, could provide much-needed relief to taxpayers, promote home ownership, and bolster the real estate sector, which is a crucial driver of the economy.