How a home loan can cut your income tax

Many people buy a home for the roof and discover the tax benefit later. It is real, and for the right taxpayer it can save a good sum every year. But it comes with conditions that are easy to miss, and one big choice that decides whether you get it at all: the tax regime you pick.

This guide explains the common position for a salaried person with a home loan on a house they live in. Your own case, for instance a let-out flat or a joint loan, may differ, and the rules change from Budget to Budget. Treat it as a map, not as advice.

A note on rules and section numbers

The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, and it renumbers the sections. Older guides and bank brochures still say Section 24(b) and Section 80C. Under the new Act the interest deduction for a self-occupied home sits in Section 22 of the 2025 Act. The ideas below are the ones that applied under the earlier numbering. Before you file, check the current limits on the Income Tax Department’s site or with a chartered accountant.

The first choice: old regime or new regime

Home loan deductions for a house you live in are available only if you choose the old tax regime. The new regime has lower tax slabs but allows almost none of these deductions. So the question is not “how much can I claim?” but “is the old regime better for me, once I count this claim and my other deductions?”

There is no single answer. It depends on your income and on everything you can deduct: home loan interest, Section 80C investments, insurance premiums, a rent allowance and more. Work out your tax under both regimes, using the calculator on the income tax e-filing portal or with a professional, before you decide.

Benefit 1: the interest you pay

Interest on a loan for a house you live in can be deducted from your income, up to ₹2,00,000 a year. The higher limit applies when the loan was taken to buy or build the home and the construction or purchase is completed within five years from the end of the financial year in which the loan was taken. If not, the limit is only ₹30,000.

Take an example. In a year you pay ₹3,20,000 in interest. Only ₹2,00,000 is allowed. If you are in the 30% slab, that deduction saves about ₹62,400 in tax, counting the 4% cess. The extra ₹1,20,000 of interest earns no tax benefit for a self-occupied home.

Benefit 2: the principal you repay

The principal part of your EMI can be claimed under the Section 80C limit of ₹1.5 lakh a year. This limit is shared with every other 80C item: PF contributions, PPF, ELSS funds, life insurance premiums, a child’s tuition fees and more. For many salaried people, PF alone fills a good part of it. If your other 80C items already add up to the limit, the home loan principal adds nothing more.

If it fits, the principal deduction can save up to about ₹46,800 at the 30% slab. Stamp duty and registration charges paid in the year you buy can also be claimed within the same 80C limit.

If you have let the house out

The whole interest can be set against the rent you earn. But if the interest is more than the rent, the loss you can set off against your other income, like salary, is limited to ₹2 lakh a year. Any remaining loss can be carried forward for eight years against future house property income. Under the new regime, the interest can be set against rent, but the loss can’t be set off against other income.

If you and your spouse are both on the loan

When two people are both owners and both co-borrowers and both repay the loan, each of them can claim their own share of the interest and principal, each within their own limits. For a couple that both pay tax in the old regime, this can double the benefit. The claim must match who actually pays the EMIs and who owns the property. A person who is not an owner can’t claim, even if they pay.

What is no longer available

• Section 80EE and 80EEA. These extra interest deductions for first-time buyers have ended. 80EE (up to ₹50,000) covered loans sanctioned in 2016-17, and 80EEA (up to ₹1.5 lakh) covered loans sanctioned between 1 April 2019 and 31 March 2022.
• The new regime’s deductions. If you choose the new regime, you can’t claim home loan interest or principal on a house you live in.

What to keep ready

• The lender’s annual certificate that shows the interest and principal you paid in the year.
• Your sale deed, allotment letter or builder’s agreement, showing you are an owner.
• Proof of possession or completion, such as an occupancy certificate, for the full limit.
• Receipts for stamp duty and registration, if you are claiming them.
• Your Form 16 and a note of other 80C investments, so you know how much of the limit is left.

Mistakes that cost people the benefit

1. 1Claiming before the house is ready. Interest before possession is claimed in five parts after it, not in the year paid.
2. 2Forgetting that principal shares the 80C limit with PF and insurance.
3. 3Both spouses claiming the full amount. Each can claim only their own share, in line with ownership.
4. 4Claiming interest when the property isn’t in your name.
5. 5Choosing the new regime without comparing, then losing deductions that were worth more.
6. 6Missing the five-year completion limit, which cuts the interest limit to ₹30,000.

The bottom line

A home loan can reduce your tax, but only in the old regime, only up to the limits, and only with the right papers. The benefit shouldn’t decide the size of your loan. Choose a loan you can repay comfortably first, and treat the tax saving as a bonus. If you are comparing home loans, we can help you see the full cost, EMI and fees, before you apply.