Under the new tax regime, homeowners can deduct full home loan interest on rented properties. However, unlike the old system, you cannot use any resulting loss from the property to reduce tax on your salary or other income. This change requires careful planning when choosing between tax regimes.
Choosing between the old and new tax regimes requires a close look at how home loan interest is treated, especially for those who own properties they rent out. Under the new tax regime, the rules for let-out properties differ significantly from those for self-occupied homes. If you have a rented property, the entire interest paid on your home loan remains fully deductible against the rental income you earn. There is no upper monetary limit on this interest deduction, allowing you to offset the interest against the money received from tenants.
The Shift in Loss Treatment
The most important change for investors to understand is the loss treatment. When your total interest, municipal taxes, and the standard deduction of 30% exceed your rental income, you face a loss under the head 'Income from House Property'. In the old tax regime, taxpayers could use this loss—up to ₹2 lakh—to lower their tax bill on other income sources, such as salary or business income. The new tax regime, however, removes this benefit. You can no longer set off house property losses against other heads of income. This means if the interest paid exceeds your rental income, the excess loss cannot be used to save tax on your salary, effectively locking the tax benefit to the rental income itself.
Self-Occupied vs. Rented Property Rules
Taxpayers must correctly categorize their properties to claim these benefits. For a self-occupied property, the new tax regime does not allow any deduction for home loan interest. This is a major departure from the old regime, which permitted a deduction of up to ₹2 lakh for self-occupied house property interest. If you are comparing your options, the loss of this deduction for self-occupied homes is a key factor that often makes the old regime more attractive for individuals with large mortgage payments.
Planning for Tax Filings
When managing your finances for tax purposes, avoid common pitfalls that can lead to scrutiny or missed savings. Many taxpayers incorrectly try to claim principal repayment under the new regime; however, Section 80C deductions are not available for those opting for the new tax structure. Additionally, for jointly owned properties, ensure that each co-owner claims the interest deduction only in proportion to their share of ownership and loan liability. For those with under-construction properties, remember that pre-construction interest is not deductible in a single year but must be claimed in five equal annual installments starting from the year the construction is finalized. Before finalizing your tax regime choice, calculate whether your total deductions—including other allowances like health insurance premiums or EPF contributions—make the old regime more beneficial than the lower tax rates offered by the new regime.