Got a home loan? Paying regular EMIs? Under Section 24 of the Income Tax Act, 1961, you can claim a deduction for the interest component under the head "Income from House Property" and reduce your taxable income.
This deduction is available under both old and new tax regimes, but carries different rules. Additionally, you must realise that this deduction applies only if the property is purchased or constructed with borrowed capital.
So, want to reduce your income tax liability? This article explains Section 24 of the Income Tax Act in detail. We will look at how it works under both the old and new tax regimes, understand the key differences, and show how you can claim deductions on home loan interest. Lastly, we will cover the impact of the Union Budget 2025 on home loan tax benefits.
Understanding section 24 of the income tax act
Section 24 of the Income Tax Act, 1961, allows an individual to claim a deduction on the interest paid on a home loan. This deduction is available under the category “Income from House Property.”
If you have taken a loan to buy, build, or repair a house, you can reduce your taxable income by claiming this deduction. This deduction is available under the old regime up to Rs. 2 lakhs per annum for the construction of self-occupied properties. For let-out properties, there is no upper limit to claim the deduction.
However, after the introduction of the new regime, there have been significant amendments in Section 24. Let’s check them out in the next section.
What are the key changes in the new tax regime?
The new tax regime was introduced in Budget 2020. It offers lower tax rates but removes most exemptions and deductions. Let’s check out some of the latest changes in the new regime:
1. Non-availability of itemised deductions
Under the old tax regime, taxpayers could reduce their taxable income by claiming itemised deductions under different sections of the Income Tax Act. One such deduction was under Section 24, which allowed a deduction of up to Rs. 2 lakh on the interest paid on a home loan for a self-occupied house.
However, in the new tax regime, most of these itemised deductions are not allowed. Instead, the government provides a standard deduction.
Since Section 24 is considered an itemised deduction, it is not available for self-occupied property under the new tax regime. But, as per the current rules, Section 24 deduction is available for let-out properties without any ceiling.
2. Optional but default regime
The government has not made the new tax regime mandatory. Taxpayers can choose either the old tax regime or the new tax regime based on what suits them best.
However, starting from the financial year 2023–24 (i.e., from April 1, 2023, onward), the new tax regime is treated as the default. This means if you do not make an active choice, the government will automatically calculate your income tax using the new regime.
Now, if a person has taken a home loan and wants to claim interest deductions under Section 24, they may find the old regime more beneficial. On the other hand, if someone has fewer deductions to claim and prefers lower tax rates, the new regime might be a better option.
3. Lower tax rates
The new tax regime offers reduced tax rates across various income slabs. However, in exchange for these lower rates, it removes many deductions and exemptions, including the deduction under Section 24 for self-occupied property.
So, under the new regime:
- You pay tax at lower rates.
- But you lose the benefit of claiming a Rs. 2 lakh deduction on home loan interest for a self-occupied house.
6 Strategies to save income tax with home loans in new and old tax regime
Home loans offer valuable tax-saving opportunities under both the old and new tax regimes. However, the benefits vary depending on the regime you choose.
Want to claim the right amount? Below are six practical strategies through which you can reduce your income tax liability by making smart use of home loan-related deductions.
1. Claim deduction on home loan interest under Section 24(b)
One of the primary benefits of taking a home loan is the tax deduction on the interest paid. Under Section 24(b) of the Income Tax Act, you can claim a deduction of up to Rs. 2 lakh per year on the interest paid on your home loan for a self-occupied property. This benefit applies to both the old and new tax regimes.
- For the new tax regime: The standard deduction for home loan interest is available. Even though the new regime offers lower tax rates, you can still benefit from this deduction, providing a significant reduction in your taxable income.
- For the old tax regime: The deduction under Section 24(b) continues to apply, allowing you to reduce your taxable income by up to Rs. 2 lakh. This can lead to substantial savings, especially if you have a high-interest loan.
Example: If you have paid Rs. 2.5 lakh in home loan interest, you can claim a deduction of Rs. 2 lakh, reducing your taxable income by that amount.
2. Utilise the principal repayment deduction under Section 80C
Another advantage of home loans is the deduction available on the principal repayment under Section 80C. You can claim a deduction of up to Rs. 1.5 lakh on the principal repayment of your home loan.
- For the new tax regime: While the new tax regime does not offer the same set of deductions as the old regime, you can still claim the principal repayment deduction if you opt for the old regime for that financial year.
- For the old tax regime: This deduction is available under Section 80C, which includes other investments like Public Provident Fund (PPF), National Pension Scheme (NPS), and Equity-Linked Savings Scheme (ELSS).
Example: If your annual principal repayment is Rs. 1.5 lakh, you can claim the full amount under Section 80C, thus reducing your taxable income by Rs. 1.5 lakh.
3. Benefit from additional deduction on home loan interest for first-time homebuyers
Under Section 80EE, first-time homebuyers can claim an additional deduction of up to Rs. 50,000 on home loan interest. This benefit is available in both the new and old tax regimes.
- For the new tax regime: If you qualify as a first-time homebuyer, you can claim this additional deduction even if you have opted for the new tax regime, ensuring that your tax burden is further reduced.
- For the old tax regime: This additional deduction complements other deductions available under the old regime, providing extra relief on your home loan interest payments.
Example: If you are a first-time homebuyer and have paid Rs. 60,000 in interest, you can claim an additional Rs. 50,000 deduction, reducing your taxable income by that amount.
4. Leverage the tax benefits on home loan for rented property
If you have rented out your property, the interest paid on your home loan can be fully claimed as a deduction under Section 24(b). There is no upper limit on this deduction for rented properties, unlike self-occupied properties.
- For the new tax regime: The benefit is still available under the new regime, allowing you to claim deductions on the entire interest amount paid, which can be particularly useful if your rental income is significant.
- For the old tax regime: You can also claim this benefit under the old tax regime, providing a significant reduction in your taxable income if you have substantial rental income.
Example: If you receive Rs. 1 lakh in rental income and pay Rs. 2.5 lakh in home loan interest, you can deduct the entire Rs. 2.5 lakh from your rental income, effectively reducing your taxable income.
5. Claim deductions for pre-construction interest
Interest paid on a home loan during the construction period is eligible for a deduction under Section 24(b) once the construction is completed. This deduction is spread over five years, with a maximum limit of Rs. 2 lakh per year.
- For the new tax regime: This benefit is available if you opt for the old tax regime. You can claim deductions for pre-construction interest under Section 24(b) in the year when the property is completed and ready for occupancy.
- For the old tax regime: This deduction allows you to recover the interest paid during the construction phase, thereby reducing your taxable income.
Example: If you paid Rs. 4 lakh in pre-construction interest, you can claim Rs. 2 lakh each year for the next five years, reducing your taxable income by Rs. 2 lakh annually.
6. Take advantage of tax benefits on home loan for joint ownership
If you and your spouse co-own the property and are both co-borrowers, each of you can claim deductions on home loan interest and principal repayments individually
- For the new tax regime: Each co-borrower can claim up to Rs. 2 lakh for interest and Rs. 1.5 lakh for principal repayment under Section 80C. This allows you to double the deductions available on a single loan.
- For the old tax regime: The same benefits apply, providing substantial tax relief by maximizing the deductions available to each co-borrower.
Example: If both you and your spouse have paid Rs. 2 lakh each in home loan interest, you can each claim the deduction, totaling Rs. 4 lakh in interest deductions.
Important Links: Home Loan Eligibility Criteria | Documents Required for Home Loan | Home Loan Balance Transfer | Joint Home Loan | Home Loan Tax Benefits | Home Loan Subsidy
Impact on taxpayers
The introduction of the new tax regime and the changes in how Section 24 works have important effects on taxpayers. These changes influence:
- How much tax does a person have to pay
and - How should they plan their finances
Let’s study how these changes impact you in detail:
1. Choose between the two tax regimes
Tax payers now have to decide between two systems:
Old tax regime |
New tax regime |
It allows many deductions and exemptions.
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Offers lower tax rates but does not allow most deductions.
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As a taxpayer with an active home loan, you must compare the total tax you would pay under both regimes.
2. Do smart financial planning
If you have purchased a house using a loan, you must consider the tax impact of that loan. Using its interest portion, you can reduce taxable income under Section 24.
However, as mentioned above, the tax rules vary between the regimes. To do smart financial planning, you should analyse:
- How much interest will you pay each year
- Whether you can use that interest to lower your taxable income
- Which tax regime gives you more benefit in the long run
3. Remain compliant and maintain documentation
To claim deductions under Section 24 (particularly in the old tax regime), you must follow certain rules:
- Keep records of the home loan, such as:
- The loan sanction letter
- Repayment schedule
- Interest certificate from the lender.
- Make sure the house is purchased, constructed, or renovated using a valid loan.
- Claim the deduction while filing the income tax return (ITR).
If the documents are missing or the rules are not followed, the deduction may be denied. This could lead to penalties and even notices from the Income Tax Department.
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How budget 2025 will impact home loan tax deductions
The Union Budget 2025 has brought several changes that affect people who already have a home loan. Primarily, these changes have revised rules under both regimes.
As a home loan borrower, you must understand these updates and see how they affect your finances. Let’s check them out:
Key Highlights of Budget 2025
- The budget has made homes more affordable for middle-class and first-time buyers by offering tax relief and promoting housing projects.
- The provisions under Section 80C have been amended to support the homebuyers.
- These changes offer greater financial relief and promote homeownership in India.
What Does This Mean for Homebuyers?
The latest changes proposed in the Union Budget 2025 will have several positive implications for home loan borrowers:
- Encourages first-time home buyers
- With higher tax benefits, more people (particularly those buying their first home) feel motivated to purchase a property.
- That’s because the latest changes have significantly reduced the cost of borrowing.
- Boost to the real estate sector
- As more people decide to buy homes, there will likely be an increase in the demand for residential properties.
- This will let the real estate industry grow along with more construction activity.
Understanding Section 80C Deduction for Home Loans
Section 80C of the Income Tax Act allows individuals to claim a deduction of up to Rs. 1.5 lakh per year on certain expenses and investments. This covers the principal repayment of a home loan.
Some important points to note:
- This deduction can only be claimed after the construction of the house is complete.
- The house must not be sold within five years of purchase. If it is sold before this period:
- The tax benefits claimed earlier will be reversed
and - The amount will be added back to the taxable income in the year of sale.
- The tax benefits claimed earlier will be reversed
This rule prevents misuse of the tax benefit by people who buy property with a short-term speculation mindset.
Additional Home Loan Tax Benefits
In addition to the benefits under Sections 24(b) and 80C, the government offers another deduction available under Section 80EEA. This section provides an additional deduction of Rs. 1.5 lakh on interest payments for first-time homebuyers who are buying affordable housing.
To claim this deduction:
- The loan must be sanctioned within the date range specified by the government.
- The house value and loan amount must fall within the limits defined under the affordable housing rules.
When combined, you can enjoy these deductions:
- Section 24(b): Up to Rs. 2 lakh
- Section 80C: Up to Rs. 1.5 lakh (for principal)
- Section 80EEA: Extra Rs. 1.5 lakh (for eligible first-time buyers)
These combined benefits offer substantial tax relief to eligible homebuyers.
Benefits for Existing Home Loan Borrowers
As an existing home loan borrower, you can also take advantage of the latest changes announced in the Union Budget 2025. Let’s see how:
- Achieve a higher tax saving
- You can enjoy a deduction up to Rs. 2 lakhs under Section 24(b) for self-occupied properties.
- This allows existing borrowers to reduce their total taxable income, which ultimately leads to less income tax liability.
- Prepay your home loan
- Due to the availability of several deductions, borrowers may now be more willing to increase repayments within their financial capacity.
- This can be done through “prepaying” either by:
- Increasing monthly payments
or - Making part-prepayments (one-time extra payments)
- Increasing monthly payments
- Prepaying reduces your overall interest burden and lets you achieve long-term savings.
Conclusion
Navigating the tax implications of a home loan requires strategic planning, especially with the introduction of the new tax regime. By leveraging the various deductions available under both the old and new tax regimes, you can optimize your tax savings and make your home loan more affordable.
To maximize these benefits, consider consulting with a financial advisor or tax consultant to tailor your tax-saving strategies to your specific situation. Additionally, Bajaj Housing Finance offers home loans that can be seamlessly integrated with these tax benefits. With competitive home loan interest rates and flexible terms, Bajaj Housing Finance can help you achieve your homeownership goals while optimising your tax savings.
Explore your home loan options with Bajaj Housing Finance today and make the most of the tax benefits available under both the old and new tax regimes. Take control of your financial future and enjoy the advantages of smart home loan planning.
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