Home Loan Tax Benefits in India: A Complete Guide 2026

A Home Loan gives a borrower two things at once. The first is the money to buy or build a house. The second is a set of tax deductions that reduce taxable income while the loan is being repaid. These deductions, together called Home Loan tax benefits, apply to both the interest paid and the principal repaid and can meaningfully lower the annual tax outgo of a salaried or self-employed borrower.

Aditi is a 34-year-old software engineer in Hyderabad. She bought her first home two years ago with a ₹50 lakhs Home Loan at 8.75 per cent per annum for 20 years, at a monthly EMI of about ₹44,186. In her second year, she paid roughly ₹4.25 lakhs in interest and ₹1.05 lakhs in principal. She has been claiming Home Loan deductions under the old tax regime and now wants to understand whether to switch to the new regime, which is the default from Financial Year 2026-27.

The sections below explain the main Home Loan tax benefits available in India, what has changed under the Income-tax Act, 2025, how the two regimes compare for a Home Loan borrower and the steps to claim these benefits correctly.

What is a Home Loan Tax Benefit

A Home Loan tax benefit is a deduction the borrower can claim from taxable income in a given financial year, on the money paid towards a Home Loan. Two components are eligible: the interest paid, deductible under the provisions of the Income-tax Act that deal with income from house property; and the principal repaid, deductible under the chapter covering tax-saving investments, subject to an overall cap that also includes items such as EPF, PPF and life insurance premiums.

If you took out a loan between 2016 and 2022, you might qualify for extra interest deductions as a first-time buyer under older rules. The rules are a bit different for properties that are still being built and for rental properties.

The key change to note is that most Home Loan tax benefits apply only under the old tax regime. The new regime, which is the default from Financial Year 2026-27 under the Income-tax Act, 2025, does not permit these deductions for a self-occupied property. Understanding this is central to choosing the right regime.

Home Loan Interest Tax Benefit Under Section 24(b)

Section 24(b) of the Income-tax Act, 2025 allows a borrower to deduct the interest paid on a Home Loan from taxable income. It is the single largest housing loan tax benefit for most salaried borrowers.

For a self-occupied residential property, the interest deduction is capped at ₹2 lakhs a year. If the actual interest paid is higher, only ₹2 lakhs can be claimed. For a let-out property, the entire interest is deductible against rental income, though the total loss under "Income from House Property" that can be set off against other heads is capped at ₹2 lakhs a year under the old regime. Under the Income-tax Act, 2025, the Section 24(b) deduction of ₹2 lakhs for self-occupied property is available only under the old regime, not the new regime.

For Aditi, the interest paid during the second year on a ₹50 lakhs Home Loan was ₹4.25 lakhs. Under the old tax regime, she can claim a deduction of up to ₹2 lakhs against her taxable income. Under the new tax regime, she cannot claim this deduction for a self-occupied property.

A separate rule applies to property under construction. Interest paid during the construction period is not deductible in the year it is paid. It is accumulated and claimed in five equal instalments starting from the year of completion. This should be planned for at the time of the loan application.

Housing Loan Principal Repayment Tax Benefit Under Clause 123

The housing loan principal repayment tax benefit is claimed under Clause 123. The principal repaid during the financial year is deductible up to an overall Clause 123 ceiling of ₹1.5 lakhs, which also includes EPF, PPF, ELSS, five-year fixed deposits and life insurance premiums.

Two conditions apply. First, the deduction is available only after possession has been taken; no principal deduction is available during construction. Second, if the property is sold within five years from the end of the financial year of possession, the entire amount previously claimed under Clause 123 for the principal is added back to the income of the seller in the year of sale. Stamp duty and registration charges paid at purchase are also eligible under Clause 123, in the year paid, within the same ₹1.5 lakhs cap.

Also Read: Tax Exemptions on Taking a Home Construction Loan

Additional Tax Rebate on Home Loan for First-Time Buyers

Two legacy provisions offer an additional tax rebate on Home Loan interest for first-time buyers, over and above the Section 24(b) limit, for loans sanctioned in specific windows.

• Section 130: An additional deduction of up to ₹50,000 a year, for loans sanctioned in FY 2016-17, with property value up to ₹50 lakhs and loan up to ₹35 lakhs.
• Section 131: An additional deduction of up to ₹1.5 lakhs a year, for loans sanctioned between 1 April 2019 and 31 March 2022, where the stamp duty value of the property is up to ₹45 lakhs. It runs until the loan is fully repaid.

Both are legacy provisions. New loans sanctioned after March 2022 do not qualify. Both benefits apply only under the old regime.

Old Tax Regime vs New Tax Regime: Which Suits a Home Loan Borrower

This is the most important decision a Home Loan borrower faces at the start of each financial year. The comparison for Aditi, at a gross income of ₹15 lakhs, is set out below.

For Aditi at this income level, the new regime results in a lower tax outgo of about ₹50,000 a year, despite her losing the Home Loan deductions. The reason is that the new regime offers materially lower slab rates and a higher standard deduction, which more than offset the loss of Section 24(b) and Clause 123 for a borrower whose eligible Home Loan deductions add up to about ₹3.5 lakhs.

The old regime becomes more favourable when total deductions in a year, combining Section 24(b), Clause 123, house rent allowance and other exemptions, cross roughly ₹4.5 to ₹5 lakhs, especially for taxpayers in the 20 to 30 per cent slab. For each borrower, the situation is different and running your own numbers before the start of the year is essential.

Once the tax implications are clear, choosing a Home Loan that aligns with your repayment capacity becomes equally important. Godrej Housing Finance offers flexible Home Loan solutions designed to support different financial requirements.

Also Read: Home Loan: All You Need to Know

How to Claim Home Loan Tax Benefits

Claiming Home Loan tax benefits correctly requires the right documents and the right treatment during the year.

• Home Loan Interest Certificate: The lender issues a certificate at the end of the financial year showing the interest and principal paid.
• Possession letter or occupancy certificate: Required as proof that the property is complete and eligible for deductions.
• Salaried borrowers should submit the interest certificate to the employer at the start of the year so that TDS on salary correctly reflects the deduction. Self-employed borrowers claim directly in their income tax return.
• Joint borrowers, such as spouses who are co-owners, can each claim Section 24(b) and Clause 123 benefits in proportion to their ownership share and EMI contribution.

An online Home Loan EMI Calculator can help estimate the yearly interest and principal split, useful for tax planning.

Common Mistakes to Avoid When Claiming Home Loan Rebate

The mistakes below appear repeatedly and are worth guarding against from the first year of the loan.

• Claiming interest deduction before possession: For self-occupied property, no deduction is available in the years before possession. Interest paid during construction should be tracked and claimed in five equal instalments starting from the year of completion.
• Ignoring joint ownership benefits: A jointly owned property with joint borrowers can double the total interest and principal deduction available, but only if both are on the loan agreement and both contribute to the EMIs.
• Overlooking Section 80EE or 80EEA for older loans: Borrowers with loans sanctioned during the eligible windows sometimes miss these additional deductions, which run alongside the Section 24(b) benefit.
• Selling the property within five years of possession: Doing so triggers a reversal of all Clause 123 principal deductions previously claimed, adding them back to the income of the seller in the year of sale.
• Choosing the tax regime without a full calculation: The choice of regime should be based on a proper comparison of total deductions available. Defaulting to the old regime because a Home Loan is being repaid is no longer a safe assumption from FY 2026-27.

Avoiding these errors preserves the full tax saving on Home Loan repayments available under the applicable provisions.

Also Read: Section 80EE vs 80EEA: Know the Difference for Home Loan Deductions

Final Thoughts

A Home Loan is one of the most powerful tax-saving tools available to a salaried or self-employed borrower, but only under the old tax regime. Under the new regime, which is the default from FY 2026-27, most Home Loan deductions are not available for a self-occupied property. Borrowers should compare the total tax outgo under both regimes at the start of every financial year, before choosing the regime. For Aditi, whose total deductions add up to about ₹3.5 lakhs at a ₹15 lakhs income, the new regime works out better despite losing Section 24(b) and Clause 123. For a borrower with materially higher deductions, the old regime is likely to still win. Confirming the position with a qualified tax advisor before filing is a sensible final step.

Apply now for a Home Loan.

FAQs

Q.1. Can a Home Loan tax benefit be claimed on a second home?

A. Yes, but with limits. Under the applicable provisions of the Income-tax Act, a taxpayer can treat up to two houses as self-occupied. For the second house, if it is not let out, the ₹2 lakhs interest cap under Section 24(b) applies. If it is let out, the entire interest is deductible against rental income, subject to the overall loss set-off cap.

Q.2. Is an income tax benefit on housing loan available on a second Home Loan taken while the first is still running?

A. If the borrower has taken two Home Loans on two different properties, the deductions apply to both, subject to the treatment of each property (self-occupied or let-out) and the overall caps. The interest deduction of ₹2 lakhs is a per-taxpayer cap, not a per-loan cap, for self-occupied property.

Q.3. Can top-up on a Home Loan qualify for the tax rebate on Home Loan interest?

A. Only if the Home Loan top-up amount is used for the purchase, construction, repair or renovation of the same house property. If used for personal purposes such as a wedding or a car, the interest on that portion is not deductible.

Q.4. Are Home Loan tax benefits available for a plot loan?

A. Deductions under Section 24(b) and Section 80C are available only after the construction of a house on the plot is complete and possession is taken. A pure plot loan without construction does not qualify.

Q.5. Can Home Loan tax benefits be claimed for pre-EMI interest during construction?

A. Yes, but not in the year the pre-EMI interest is paid. Pre-construction interest is aggregated and claimed in five equal annual instalments starting from the financial year of completion, within the overall Section 24(b) cap for each year.

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