As the ITR filing season for FY2025-26 opens, homeowners are navigating the shrinking real-world impact of interest deductions. While the old tax regime still allows claims under Section 24(b) and 80C, the stagnant ₹2 lakh limit is increasingly dwarfed by rising property prices and interest rates. The shift toward the new tax regime, which excludes these deductions, is forcing a change in how buyers assess property affordability and loan planning.
What Happened
With the Income Tax Return (ITR) filing season for FY2025-26 underway, the discussion around home loan tax benefits has resurfaced. Taxpayers are evaluating whether the traditional tax deductions attached to home ownership—namely under Section 24(b) for interest and Section 80C for principal—still hold significant value in their overall financial planning. This scrutiny comes at a time when property prices have risen by roughly 7% and housing sales have seen a 9% year-on-year increase, according to recent industry reports. For many, the choice between the old and new tax regimes is becoming a central question, especially since the new regime generally does not allow these specific home loan deductions.
The Old vs New Regime Choice
Under the old tax regime, homebuyers can claim an annual deduction of up to ₹2 lakh on home loan interest for self-occupied properties under Section 24(b). Additionally, principal repayment qualifies for a deduction of up to ₹1.5 lakh under Section 80C. However, the new tax regime, which is becoming increasingly popular, removes these deductions. For taxpayers, the decision often boils down to comparing the total tax outgo after factoring in these deductions versus the lower slab rates offered by the new regime. As the new regime gains traction, the traditional "tax-saving" argument for buying a home is playing a smaller role in urban property decisions than it did in the past.
The Inflation Problem: Why The ₹2 Lakh Cap Feels Small
One of the biggest concerns for homeowners is that the ₹2 lakh interest deduction limit has remained unchanged for over two decades. In the current interest rate environment, this limit is becoming insufficient for a growing number of borrowers. For instance, on a loan of ₹50 lakh at an interest rate of 8.5%, the annual interest outflow in the initial years exceeds ₹4 lakh. This means that nearly half of the interest expense remains ineligible for tax benefits, effectively diluting the incentive to use a home loan as a tax-saving tool. While these deductions still offer meaningful relief for affordable housing borrowers with loans in the ₹15 lakh to ₹35 lakh range, the benefit is less impactful for those purchasing higher-value homes in metropolitan areas.
Lenders Focus on Cash Flow Over Tax Breaks
As the importance of tax-saving motives diminishes for some buyer segments, lenders are shifting their underwriting focus. Financial institutions are increasingly evaluating loan applicants based on their actual cash flow and repayment resilience rather than tax-adjusted affordability. The modern assessment now prioritizes net take-home salary, current debt liabilities, and stress-tested repayment capacity. This shift reflects a broader market trend where lenders aim to minimize default risks by ensuring that borrowers can comfortably manage their EMIs from their post-tax income, regardless of the tax deductions they might claim.
What Taxpayers Should Track
Taxpayers should focus on their specific financial profile rather than relying solely on legacy tax-saving strategies. The key monitorable for the current filing season is the comparative tax liability calculation—comparing the total tax paid under the old regime (with deductions) against the new regime (without deductions but with potentially lower rates). Additionally, as discussions continue regarding a possible revision of these deduction thresholds to better align with current property costs, taxpayers may watch for any updates from the government regarding future policy changes. For now, financial planning should prioritize long-term repayment capacity and personal cash flow management over the potential tax benefit of a home loan.