Home Loan and Tax Planning in FY 2025-26: Is It Still a Good Option?

Introduction

A home loan has long been a popular tax-saving tool, allowing borrowers to claim deductions on principal repayment (Section 80C) and interest payments (Section 24(b)). However, with the New Tax Regime becoming the default in FY 2025-26, tax benefits on self-occupied homes have been removed.

This shift has led many taxpayers to wonder: Is a home loan still useful for tax planning? The answer depends on several factors, including whether you choose the Old or New Tax Regime, whether your property is self-occupied or rented, and how you structure your loan.

In this article, we will cover:
✔️ Tax benefits on home loans in FY 2025-26
✔️ Impact of the New vs. Old Tax Regime
✔️ Best tax-saving strategies for home loan borrowers
✔️ Common mistakes to avoid
✔️ FAQs to clarify your doubts

Let’s explore these points in detail.

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Home Loan Tax Benefits in FY 2025-26: What Has Changed?

1. Home Loan Tax Benefits Under the Old Tax Regime

If you opt for the Old Tax Regime, you can still claim tax benefits on your home loan:

A. Deduction on Principal Repayment (Section 80C)

• You can claim up to ₹1.5 lakh per year on home loan principal repayment.
• This applies only to residential properties, not commercial properties or land.
• You must hold the property for at least 5 years to avoid reversal of deductions.

B. Deduction on Home Loan Interest (Section 24(b))

• For self-occupied properties, a deduction of up to ₹2 lakh per year is allowed on home loan interest.
• For rental properties, there is no upper limit on interest deduction. However, the total loss from house property that can be adjusted against other income is capped at ₹2 lakh per year.
• If the interest exceeds ₹2 lakh, the excess can be carried forward for 8 years but can only be adjusted against future rental income.

C. Additional Deduction for First-Time Homebuyers

If you are buying your first home, you may qualify for extra deductions:

• Section 80EE: Additional ₹50,000 deduction on interest, available only for loans sanctioned before March 31, 2017.
• Section 80EEA: Extra ₹1.5 lakh deduction on interest for loans under affordable housing taken before March 31, 2022.

These deductions make the Old Tax Regime more attractive for home loan borrowers.

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2. Home Loan Tax Benefits Under the New Tax Regime

Under the New Tax Regime (applicable from FY 2025-26):

🚫 No deduction on home loan principal (Section 80C)
🚫 No ₹2 lakh interest deduction for self-occupied properties
✅ Interest deduction on rental properties is still allowed

If you choose the New Tax Regime, home loan tax benefits are significantly reduced unless you rent out the property.

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Which Tax Regime Should You Choose?

If you already have a home loan, the Old Tax Regime is better because you can still claim up to ₹3.5 lakh in deductions (₹1.5 lakh principal + ₹2 lakh interest).

If you are taking a new home loan, consider:

• If your tax savings from deductions are higher than the benefit of lower tax rates, choose the Old Tax Regime.
• If you don’t qualify for major deductions, opt for the New Tax Regime for simplified taxation.
• If you plan to rent out the property, the New Tax Regime is still beneficial, as it allows interest deductions.

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How to Maximize Tax Benefits on Home Loans?

1. Consider a Joint Home Loan

A joint home loan with a spouse or family member allows each borrower to claim separate deductions:
✔️ Up to ₹2 lakh on interest per person
✔️ Up to ₹1.5 lakh on principal per person
✔️ Effectively doubles total tax deductions

2. Rent Out Your Property for Tax Benefits

Since self-occupied home loans don’t get tax benefits under the New Regime, renting out your property ensures you can still claim interest deductions.

3. Optimize Loan Tenure

A longer tenure means higher interest payments, leading to higher deductions under the Old Regime. However, it also increases your total interest cost. Strike a balance based on your financial goals.

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Common Mistakes to Avoid

🚫 Taking a home loan just for tax savings – Tax laws change frequently, so focus on long-term affordability rather than just tax benefits.

🚫 Ignoring tax regime selection – If you don’t opt for the Old Regime, you automatically fall under the New Regime and lose deductions.

🚫 Not keeping proper documentation – To claim deductions, you need valid loan statements and proof of possession.

🚫 Ignoring prepayment strategies – If you can afford to prepay your loan, you should calculate whether the interest savings outweigh tax benefits.

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FAQs: Home Loan Tax Planning in FY 2025-26

1. Can I still get tax benefits on my home loan in FY 2025-26?

Yes, but only under the Old Tax Regime. Under the New Tax Regime, home loan tax benefits for self-occupied properties are removed.

2. Do I get tax benefits if I rent out my house?

Yes. Under both tax regimes, interest on a home loan for a rented property is deductible. However, the set-off against other income is limited to ₹2 lakh per year.

3. Should I choose the Old or New Tax Regime if I have a home loan?

If you have a home loan, the Old Tax Regime is usually better because it allows deductions on principal and interest payments.

4. Can a joint home loan help in tax savings?

Yes, a joint home loan allows both co-owners to claim separate deductions, effectively doubling tax savings.

5. What happens if I sell my house before 5 years?

If you sell your house within 5 years of purchase, any tax deductions claimed on principal repayment (Section 80C) will be reversed and added back to your taxable income.

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Conclusion: Is a Home Loan Still a Good Tax-Saving Tool?

With the removal of home loan tax benefits for self-occupied homes under the New Tax Regime, borrowers need to carefully evaluate their tax planning strategies in FY 2025-26.

✔️ If you already have a home loan, sticking to the Old Tax Regime ensures you continue getting deductions.
✔️ If you are taking a new home loan, analyze whether the tax benefits of the Old Regime outweigh the lower tax rates of the New Regime.
✔️ For rental properties, home loans remain a strong tax-saving tool under both regimes.

While home loans still offer some tax benefits, strategic planning is now more important than ever. Make an informed choice to maximize your tax savings!