Home loan deduction: While many salaried taxpayers have shifted to the New Tax Regime for filing taxes, many are still sticking to the old regime mainly due to the benefit of home loan deductions. Those who opt for the old regime can claim a deduction of up to Rs 2 lakh for home loan interest on a self-occupied property, a benefit not available in the New Tax Regime.
Under the New Regime, there are some concessions for let-out properties. For example, there is no limit on the deduction of home loan interest from taxable rental income according to section 24 of the Income-tax Act. However, the interest on the loan often exceeds the rental income, resulting in a loss for the property owner. Unfortunately, this loss cannot be offset against income from other sources or carried forward in the new tax regime.
ICAI has put forth three recommendations regarding the taxation of income from house property under the new tax regime:
Both home loan borrowers and industry experts are hopeful that Finance Minister Nirmala Sitharaman will address their longstanding demands for improved tax benefits.
Home loan under tax regimes
Currently, as per Section 24 of the Income-tax Act, 1961 (referred to as ‘the IT Act’), individuals can claim a deduction of up to Rs. 2 lakh for interest on home loans for self-occupied property. However, this deduction is only available under the old tax regime.
Taxpayers who choose the new tax regime outlined in Section 115BAC are not eligible for this deduction. Additionally, losses incurred under the head "income from house property" cannot be offset against other income or carried forward for adjustment in future years under the new regime.
"This limitation has adversely impacted individuals who rely on housing loans for property purchases, especially in the middle-income group. Housing loan interest often exceeds any rental income earned, creating financial stress for these taxpayers. Thus, ICAI has proposed an amendment to allow a home loan interest deduction of up to Rs. 2 lakh under the new tax regime, along with the set-off of house property losses against other income and the carry-forward of unabsorbed losses for 8 years, which would provide substantial relief. It would also promote home ownership alongside supporting real estate investments," said Dr Suresh Surana.
Additionally, the proposed measure would simplify tax compliance and encourage more taxpayers to adopt the new regime, contributing to economic growth and increasing government revenues.
Home loan under Old Tax Regime
Despite no new or improved tax breaks being implemented in the old tax regime since the simplified regime was introduced, experts are advocating for increased exemptions. This is in response to the rising cost of home ownership in urban India. Experts believe that the current tax deductions provided under sections 80C and 24B in the old tax regime are inadequate, and they are calling for reforms to make owning a home more affordable.
Increased tax exemptions
The expenses associated with owning a home in urban areas can be quite burdensome, often leading buyers to take out substantial loans that impact their finances and limit their ability to save and spend. Currently, homeowners are able to benefit from deductions provided in sections 80C and 24B of the tax code. For individuals occupying their own residences, there is a maximum tax exemption available for home loan interest of up to Rs 2 lakh annually under section 24(b), as well as a tax exemption on principal repayments of up to Rs 1.5 lakh under section 80C.
Consolidate tax benefits
In order to enhance tax compliance and streamline the current Income Tax Laws, the government is considering a comprehensive revamp of the Income Tax Act, with potential announcement in the Budget for 2025. The main objective of the revamped I-T Act is to simplify the process of tax compliance for individuals. One proposed change as per experts will be to consolidate home loan payments, encompassing both interest and principal, into a single tax section dedicated to home loans. Additionally, it has been suggested that the maximum deductions on home loans be increased to Rs 5 lakh, thereby offering taxpayers more substantial tax deductions on their interest payments, especially in the initial years.
Introduction of Section 80EEA
The deduction under Section 80EEA, which provided first-time home buyers with up to Rs 50,000 deduction on home loan interest payments, was discontinued post-March 2022. Reinstating benefits under this section is a critical expectation as it could potentially boost investments in affordable housing by offering additional tax deductions. This initiative has the potential to stimulate interest in affordable housing among a wider audience.