Home-loan tax deductions under the Income-tax Act, 2025: old vs new regime, with worked examples

Rules and rates as of 12 October 2026.

The Income-tax Act, 2025 came into force on 1 April 2026 and renumbered almost every provision a home-loan borrower used to quote. The old "section 24(b)" interest deduction now sits in section 22, and "80C" principal repayment now sits in section 123 read with Schedule XV. The substance has changed far less than the numbering. The bigger question for most salaried borrowers is which regime to pick. This explainer walks through the rules for tax year 2026-27 (April 2026 to March 2027) and works through one loan in detail.

The new numbers, mapped

• Annual value: section 21 (formerly section 23). Under section 21(6), a house you live in, or cannot occupy for any reason, has an annual value of nil. Section 21(7) limits this to two houses you specify, and only if the house is not let out at any time in the year.
• Deductions from house property: section 22 (formerly section 24). Section 22(1)(a) gives a flat 30% of annual value. Section 22(1)(b) allows interest on money borrowed to buy, build, repair or reconstruct the house. Section 22(1)(c) spreads interest paid before the year of purchase or completion over five equal instalments.
• Cap for a self-occupied home: section 22(2). Interest on a house covered by section 21(6) is capped at ₹2,00,000, if it was bought or built with a loan, construction finished within five years from the end of the tax year the money was borrowed, and you have a certificate from the lender. Otherwise the cap is ₹30,000.
• Principal, stamp duty and registration: section 123 (formerly 80C), up to ₹1,50,000 in total with your other eligible items. Schedule XV lists the qualifying lenders (banks, LIC, NHB, housing finance companies and certain employers). It takes back the deduction if you sell the house within five years from the end of the tax year you got possession.
• Loss set-off: section 109 (formerly 71). A loss under "Income from house property" can be set off against salary or other heads only up to ₹2,00,000 a year.
• Carry forward: section 110 (formerly 71B). The rest of the loss carries forward for up to eight tax years, and can only be set off against future house property income.
• New regime: section 202 (formerly 115BAC). This is now the default. You choose the old regime by exercising the option under section 202(4), along with your return if you have no business income.

Self-occupied versus let-out

A self-occupied home has nil annual value, so the interest you pay creates a loss under house property, capped at ₹2 lakh. Under the old regime, that loss reduces your salary income.

A let-out home is different. You start from the rent (or the reasonable expected rent, if higher), subtract municipal taxes you paid, then take 30% off and deduct the full interest with no cap. If the interest is larger than the rent, you get a loss. The old regime lets you set ₹2 lakh of it against salary and carry the rest forward for eight years.

What the new regime takes away

Section 202(2) lists what you give up. It includes interest under section 22(1)(b) on a house covered by section 21(6), which means a self-occupied home. It also excludes almost all of Chapter VIII, which is where section 123 sits, so principal repayment gets no deduction either.

Interest on a let-out house is not on that list, so it still reduces your rental income under the new regime. But section 202(2)(b) blocks setting off a house property loss against any other head. Section 202(3) then treats that loss as "deemed to have been given full effect to", so it cannot be carried forward either. In short, under the new regime, let-out interest can wipe out the rent but nothing more.

The rates for 2026-27

New regime (section 202(1)): nil up to ₹4 lakh, then 5%, 10%, 15%, 20% and 25% in ₹4 lakh steps up to ₹24 lakh, and 30% above that. The standard deduction on salary is ₹75,000 (section 19, table entry 2(a)). The section 156 rebate removes tax up to ₹12 lakh of income, with marginal relief just above that.

Old regime (Finance Act, 2026, First Schedule, Part I-B): nil up to ₹2.5 lakh, 5% to ₹5 lakh, 20% to ₹10 lakh, and 30% above that. The standard deduction is ₹50,000. Health and Education Cess is 4% of tax plus surcharge under section 3 of the Finance Act, 2026. There is no surcharge below ₹50 lakh.

Worked example: ₹18 lakh salary, ₹40 lakh loan

Assumptions: a resident individual under 60. A ₹40 lakh loan at an illustrative 8.5% for 20 years, taken at the start of the tax year on a ready house, with 12 EMIs paid in 2026-27. No other deductions, and no pre-construction interest.

EMI = P × r × (1+r)ⁿ ÷ ((1+r)ⁿ − 1), with P = ₹40,00,000, r = 8.5% ÷ 12 and n = 240. That gives ₹34,713 a month. Running the amortisation for 12 months, you pay ₹3,36,946 in interest and ₹79,609 in principal in year one.

Old regime, self-occupied. Salary ₹18,00,000 − ₹50,000 standard deduction = ₹17,50,000. The house property loss is the interest capped at ₹2,00,000, so ₹1,36,946 of interest gets no relief at all. Principal under section 123 is ₹79,609. Taxable income = 17,50,000 − 2,00,000 − 79,609 = ₹14,70,391. Tax = 1,12,500 + 30% × 4,70,391 = ₹2,53,617. Add cess of ₹10,145 for a total of ₹2,63,762.

New regime, self-occupied. 18,00,000 − 75,000 = ₹17,25,000. Interest and principal are both disallowed. Tax = 20,000 + 40,000 + 60,000 + 25,000 (20% of the ₹1,25,000 above ₹16 lakh) = ₹1,45,000. Add cess of ₹5,800 for a total of ₹1,50,800.

Let-out variant. The same flat is let for ₹25,000 a month (₹3,00,000 a year), and you pay ₹6,000 in municipal tax. Annual value = ₹2,94,000. Less 30% (₹88,200) and less full interest (₹3,36,946), you get a loss of ₹1,31,146.

• Old regime: the whole loss is within the ₹2 lakh set-off limit. Taxable income = 17,50,000 − 1,31,146 − 79,609 = ₹15,39,245. Tax is ₹2,74,274, plus cess of ₹10,971, for a total of ₹2,85,244.
• New regime: the rent is fully absorbed by the interest, so nothing from the flat is taxed. But the ₹1,31,146 loss cannot touch your salary and lapses. Taxable income stays ₹17,25,000, and the total is ₹1,50,800.

Case (tax year 2026-27)	Old regime	New regime
No home loan	₹3,51,000	₹1,50,800
Self-occupied, loan as above	₹2,63,762	₹1,50,800
Let-out at ₹25,000/month	₹2,85,244	₹1,50,800
Self-occupied, section 123 limit fully used (₹1.5 lakh)	₹2,41,800	₹1,50,800

All figures include 4% cess and are rounded to the rupee.

Reading the result

At this salary, the home loan narrows the gap but does not close it. For the old regime to match the new one here, taxable income would have to fall to about ₹11.08 lakh. That means roughly ₹6.42 lakh of deductions on top of the ₹50,000 standard deduction. A self-occupied home loan can give at most ₹3.5 lakh (₹2 lakh interest plus ₹1.5 lakh under section 123). The old regime only comes out ahead with large other deductions or exemptions, or at different income levels. That calculation is personal.

A few points the example does not capture. Interest from before completion is spread over five years under section 22(1)(c). Stamp duty and registration count towards section 123 only in the year you pay them. Selling within five years reverses the section 123 deduction.

This is an explanation of the law, not tax advice. Ask a chartered accountant to run your actual salary structure, loan statement and any other deductions through both regimes before you file.