Home Loan Tax Benefits Under the Income-tax Act, 2025
- The rules in one table
- Interest on a self-occupied house
- Principal repayment under section 123
- Worked example 1: a self-occupied flat, old regime
- Worked example 2: a let-out flat
- Note: carrying forward a loss under the new regime
- Common mistakes
- Year labels
- Where this fits
For tax year 2026-27, a home loan can reduce tax in three ways, all under the old regime:
- interest on a self-occupied house, deductible up to ₹2,00,000 a year under section 22 of the Income-tax Act, 2025 (earlier 24(b));
- principal repayment, which counts towards the ₹1,50,000 limit of section 123 (earlier 80C);
- a house property loss of up to ₹2,00,000 set off against salary or other income.
For a let-out house, interest is deductible without the ₹2,00,000 cap, though the loss you can set against other income is still limited to ₹2,00,000. The new regime allows none of this for a self-occupied home. It allows interest on a let-out house only within the house property head, with no set-off against other income.
The rules in one table
| Benefit | Provision | Old regime | New regime |
|---|---|---|---|
| Interest, self-occupied house (up to two houses) | Sections 21(6), 22(1)(b), (c) and 22(2) | Up to ₹2,00,000 in aggregate | Not allowed (section 202(2)(a)(v)) |
| Interest, let-out house | Section 22(1)(b) | Full interest | Full interest, within the head only |
| 30% standard deduction on annual value | Section 22(1)(a) | Yes (let-out) | Yes (let-out) |
| Principal repayment, stamp duty, registration | Section 123, Schedule XV para 1(r) and 3 | Within ₹1,50,000 overall | Not allowed |
| House property loss against other heads | Section 109(1)(b) | Up to ₹2,00,000 a year | Not allowed (section 202(2)(b)(ii)) |
| Carry forward of the remaining loss | Section 110 | 8 tax years, against house property income | See the note below |
Interest on a self-occupied house
Under section 21(6), a house you occupy as your own residence, or cannot occupy for any reason, has an annual value of nil. Section 21(7) limits this to two houses you specify. Interest then creates a loss under “Income from house property”.
- The ₹2,00,000 cap. Section 22(2)(a) limits interest to ₹2,00,000 where the loan was taken to buy or construct the house and certain conditions are met. The acquisition or construction must be completed within five years from the end of the tax year in which the loan was taken, and you need a certificate from the lender. Otherwise the cap is ₹30,000 (section 22(2)(b)). This applies to loans taken for repair or renovation, for example.
- Two houses, one cap. Section 22(5) keeps the aggregate for both self-occupied houses at ₹2,00,000.
- Pre-construction interest. Interest for the period before the tax year in which you acquire or complete the house is allowed in five equal instalments, starting that year (section 22(1)(c)). The Finance Act, 2026 amended section 22(2) so that the ₹2,00,000 cap covers these instalments too, not only the current year’s interest.
Principal repayment under section 123
Schedule XV, paragraph 1(r), read with paragraph 3, allows under section 123:
- repayment of a loan taken to buy or construct a residential house, from a bank, co-operative bank, LIC, National Housing Bank, a housing finance company of the specified kind, or certain employers;
- stamp duty, registration fees and other transfer expenses;
- instalments paid to development authorities, housing boards, or a company or co-operative society for an allotted house.
It excludes renovation or additions after the completion certificate or occupation, and anything already deducted under section 22.
The five-year lock. Under paragraph 4 of Schedule XV (Table Sl. No. 3), if you transfer the house before five years from the end of the tax year in which you obtained possession, no further deduction is allowed. All principal deductions claimed in earlier years are also taxed as your income in the year of transfer.
Worked example 1: a self-occupied flat, old regime
Anand is salaried, pays tax at 30% under the old regime, and lives in a flat bought with a bank loan. In tax year 2026-27:
| Item | Paid | Deductible |
|---|---|---|
| Interest on the home loan | ₹2,60,000 | ₹2,00,000 (cap) |
| Principal repayment | ₹1,10,000 | ₹1,50,000 (section 123 cap) |
| Other section 123 items (PPF, life insurance) | ₹60,000 | |
| Total reduction in income | ₹3,50,000 |
The ₹2,00,000 house property loss is set off against salary (section 109(1)(b)). At 30% plus 4% cess, the reduction of ₹3,50,000 is worth ₹1,09,200 in tax. The ₹60,000 of interest above the cap is lost; it cannot be carried forward.
Worked example 2: a let-out flat
Meenakshi lets out a flat for ₹30,000 a month and pays ₹20,000 of municipal tax. Her loan interest for the year is ₹4,50,000.
| Step | Amount |
|---|---|
| Rent received (annual value) | ₹3,60,000 |
| Less municipal tax paid (section 21(3)) | ₹20,000 |
| Net annual value | ₹3,40,000 |
| Less 30% standard deduction (section 22(1)(a)) | ₹1,02,000 |
| Less interest (section 22(1)(b), no cap) | ₹4,50,000 |
| Loss from house property | ₹2,12,000 |
- Old regime: ₹2,00,000 is set off against her salary. The remaining ₹12,000 is carried forward under section 110, for up to eight tax years, against future house property income.
- New regime: none of the loss can be set off against salary (section 202(2)(b)(ii)).
Note: carrying forward a loss under the new regime
Section 202(3) says the loss referred to in section 202(2)(b) “shall be deemed to have been given full effect to and no further deduction for such loss” shall be allowed in later years. Read literally, that covers a house property loss that could not be set off against other heads, which suggests it cannot be carried forward either.
If you rely on carrying such a loss forward under the new regime, take professional advice first.
Common mistakes
- Claiming interest on a self-occupied house under the new regime. Section 202(2)(a)(v) removes it. Employers applying the new regime will not allow it.
- Counting pre-construction interest on top of the ₹2,00,000 cap. Since the Finance Act, 2026 amendment, the instalments sit inside the cap.
- Selling within the lock-in. Selling within five years of the end of the year of possession reverses past principal deductions.
- Missing the lender’s certificate. Without it, the ₹2,00,000 cap for a purchase or construction loan is not available.
- Renovation loans. For a self-occupied house, interest on a loan for repairs is capped at ₹30,000, and renovation costs are excluded from section 123.
Year labels
This page applies to tax year 2026-27 onwards under the Income-tax Act, 2025. For FY 2025-26 (AY 2026-27), the Income-tax Act, 1961 applied, through sections 24(b), 80C, 71 and 71B.
Where this fits
- EMI and interest split: home loan EMI calculator
- Owning versus renting: buy vs rent
- What the new regime still allows: deductions allowed under the new regime
- Prepaying the loan: home loan prepayment vs SIP
Sources. Income-tax Act, 2025, sections 20 to 22, 109, 110, 123 and 202 and Schedule XV, Gazette of India, 21 August 2025. Finance Act, 2026, section 38, Gazette of India, 30 March 2026.