Home Loan Interest Advantage in New Tax Regime: How You Can Reduce Your Tax Burden

When it comes to tax deductions, home loan interest has long been a valuable benefit for homeowners. However, with the introduction of the new tax regime under Section 115BAC, there are significant changes in how you can claim interest deductions on home loans. This article dives into the details, helping you understand how you can still make the most of your home loan interest while navigating the new tax structure.

Old vs. New Tax Regime: Understanding the Difference

Under the old tax regime, taxpayers could claim a deduction of up to ₹2 lakh on the interest paid for a home loan on a self-occupied property. In addition, any loss exceeding ₹2 lakh could be carried forward for up to eight years. However, under the new tax regime, things work differently.

The new tax regime does not allow individuals to claim deductions on home loan interest for self-occupied properties. If you're a homeowner, this means that you will lose a valuable deduction that was previously available. Any losses from home loan interest under the new regime cannot be carried forward, limiting the potential tax benefits for self-occupied property owners.

How Can You Set Off House Property Loss?

For taxpayers with ongoing home loans, the ability to claim a loss from house property can still be an effective way to reduce their taxable income. But the key distinction lies in the type of house property you own—whether it is self-occupied or let-out (rented).

Set-Off for Self-Occupied Property

For a self-occupied house, the ₹2 lakh deduction for home loan interest is no longer applicable under the new tax regime. Previously, this deduction allowed taxpayers to claim interest payments and reduce their taxable income significantly. However, under Section 115BAC, this benefit has been entirely removed for self-occupied properties.

Set-Off for Let-Out Property

The rules for let-out properties differ. Under the new regime, you can still claim a deduction for the interest paid on a home loan taken for a rented property. The only condition is that the interest claimed cannot exceed the net rental income from that property. If the interest amount exceeds the rental income, the excess will not be carried forward and will lapse.

Example: If you pay ₹5 lakh in interest on a let-out property but only earn ₹3 lakh in rent, you can only deduct up to ₹3 lakh, and the remaining ₹2 lakh will not be carried forward to future tax years.

How to Maximize Tax Savings on Home Loan Interest

While the new tax regime may seem limiting, there are still ways to manage your home loan interest to reduce your tax liability:

1. Analyze Both Regimes Before Filing

Before making your final decision on which tax regime to opt for, calculate your total tax liability under both the old and new regimes. The old regime allows for deductions on home loan interest for self-occupied properties and lets you carry forward losses for future years. The new regime, though simpler, eliminates many deductions, including this one.

2. Focus on Let-Out Properties

If you own multiple properties and one is let-out, the new tax regime allows you to claim interest deductions on the let-out property. This could still offer substantial savings, especially if your rental income is relatively high.

Section 115BAC: Key Provisions

Section 115BAC was introduced as part of the new tax regime to simplify the filing process and eliminate the need for many exemptions and deductions. While the new regime offers lower tax rates across various income brackets, it has its downsides—particularly for homeowners with ongoing home loans. Under this section:

• No deduction is available for home loan interest on self-occupied properties.
• Losses from self-occupied properties cannot be carried forward or set off against any other income.
• Let-out properties still allow for deductions, but losses cannot be carried forward if they exceed rental income.

Example: Home Loan Interest Deduction Under Old and New Regimes

Consider the case of Mr. A, who has two properties:

• Self-Occupied Property: Mr. A has a home loan on this property with an annual interest of ₹2 lakh.
• Let-Out Property: Mr. A also owns a rented house with a home loan interest of ₹5 lakh. His annual rental income from this property is ₹8 lakh.

Under the old tax regime, Mr. A could claim a total deduction of ₹7 lakh (₹2 lakh for self-occupied and ₹5 lakh for let-out property), reducing his taxable income significantly. However, under the new tax regime, Mr. A would lose the ₹2 lakh deduction for the self-occupied property, and can only claim the ₹5 lakh interest on the let-out property.

If Mr. A’s rental income was only ₹3 lakh, under the new regime, he would only be able to claim a deduction for ₹3 lakh of the ₹5 lakh interest paid, with the remaining ₹2 lakh lapsed.

Important Considerations Before Opting for the New Tax Regime

Transitioning to the new tax regime might seem appealing because of the lower tax rates, but it’s crucial to evaluate the impact of losing key deductions like the home loan interest. Here are some things to keep in mind:

• Carried Forward Losses: If you have previously carried forward losses under the old regime, they will not be allowed in the new regime if they are related to self-occupied properties.
• Rental Properties: If you own rental properties, the new regime can still provide tax-saving opportunities through interest deductions. However, ensure that the rental income is substantial enough to offset the interest.
• Tax Planning: Proper tax planning can help you determine whether to opt for the old or new regime. Evaluate your home loan interest, rental income, and other deductions before making a decision.

Conclusion

While the new tax regime under Section 115BAC simplifies tax filing for many taxpayers, it comes at the cost of valuable deductions like the home loan interest on self-occupied properties. If you have an ongoing home loan, it’s essential to consider how this change affects your overall tax strategy. For those with rental properties, the option to claim interest deductions remains, but careful planning is required to maximize these benefits. Ultimately, it’s advisable to calculate your tax liability under both regimes and make an informed decision that best suits your financial situation.