In 2020, there was a significant change in how taxes are structured. The government introduced a new tax system during the Union Budget, which meant a major overhaul in how individuals are taxed. This new system brought about lower tax rates across different income brackets but also did away with many tax deductions and exemptions that were available in the old system. In fact, approximately 70 such exemptions were removed.

Now, taxpayers have a choice to make between sticking with the old tax system or adopting the new one. This decision is crucial because it directly impacts the tax benefits you can avail yourself of when it comes to things like home loans. For example, deductions on the principal and interest paid on home loans could vary depending on which tax regime you choose.

Factors like home loan interest rates and Equated Monthly Installments (EMIs) become especially important in this decision-making process. These factors not only influence your current financial situation but also have implications for your Income Tax Returns (ITRs). Your choice of tax regime can significantly affect how much tax you owe or get refunded, which in turn affects your overall financial planning, including your home loan repayments.

Therefore, it's essential to carefully evaluate these factors before deciding which tax regime aligns better with your financial goals and obligations. By understanding the implications of each regime and how they impact your tax benefits, you can make an informed decision that best suits your individual circumstances.

Tax Slab Comparison Between Old and New Tax Regime

Below is a table comparing the income tax rates of both the new and old tax regimes. This comparison of tax slabs aims to simplify the process of e-filing income tax returns.

In the new tax regime, it's noticeable that if your taxable income ranges between INR 5-7.5 lakhs, the tax rate is 10%, contrasting with 20% in the old regime. Furthermore, the previous tax slab of INR 10 lakhs and above has been split into three segments: INR 10-12.5 lakhs, INR 12.5-15 lakhs, and exceeding INR 15 lakhs. This breakdown can serve as a helpful guide for calculating income tax and filing income tax returns.

Also read: Is ITR for Home Loan Required? - 2024

Exemptions Not Allowed in the New Income Tax Regime

Unlike the previous tax system, the new tax structure lowers tax rates, but it comes with a trade-off: certain exemptions available before are no longer applicable. The list below outlines these exemptions and deductions that are now off the table in the new regime. This change will impact how you calculate your income tax returns and file them electronically. It's important to factor in these adjustments when assessing the overall impact of switching to the new tax system. Some exemptions no longer allowed under the new income tax regime include:

• Leave Travel Allowance
• House Rent Allowance
• Conveyance Allowance
• Relocation Allowance
• Children Education Allowance
• Standard Deduction on Salary
• Interest on Housing Loan
• Professional Tax

Deductions under Chapter VI A, which includes sections 80C, 80D, 80E, and so on. Now, let's delve into the next aspect: choosing the right tax regime, especially as a home loan borrower, as it significantly influences your decision-making and repayment process.

Income Tax Benefits on Home Loans in the Old Income Tax Regime

Tax Benefit on Principal Amount of Home Loan

Let's break down the tax benefit on the principal amount of your home loan. If you're operating under the old tax system, you're eligible for a deduction on the principal component of your Home Loan's EMI under section 80C of the Income Tax Act. However, this deduction is applicable only for a self-occupied property, and the maximum deduction allowed is INR 1.5 lakhs. To gain a clearer understanding of the breakdown between your principal and interest, you can utilize a home loan EMI calculator.

Even if you have another property that is vacant or occupied by family members such as parents, it is still considered a self-occupied property. If you're repaying Home Loans for multiple properties, you can claim an income tax return filing exemption on the principal amount for all loans. However, the total maximum limit of exemption during Income Tax Return (ITR) filings remains at INR 1.5 lakhs.

Additionally, you can claim deductions during ITR filing for expenses like stamp duty, cess, surcharge, and registration charges under section 80C of the Income Tax Act. It's important to note that the total deduction allowed under Section 80C is capped at Rs 1.5 lakh.

Tax Benefit on Home Loan Interest Rate

You can also benefit from a tax deduction on the interest paid for your home loan. According to section 24 of the Income Tax Act, if your property is self-occupied, you can claim a maximum deduction of INR 2 lakhs per financial year. Similarly, if you own a second home that is vacant or inhabited by family members, such as parents, you can also claim a deduction on the interest paid for that property under the same section. However, it's important to keep in mind that the total deduction for interest paid on both home loans combined should not exceed INR 2 lakhs.

More Deduction on Home Loan Tax Interest Rate for Affordable Housing
 

If you purchase a house categorized as affordable housing, you can receive additional income tax benefits on the interest paid for the home loan, exceeding the standard INR 2 lakhs. You can claim a deduction of INR 1.5 lakhs per year. To qualify for this exemption from income tax on home loans, you must meet the following criteria:

• The home loan must be obtained from an approved financial institution, such as a housing finance company or bank.
• The stamp value of the property should not exceed INR 45 lakhs.
• You must not possess any other residential property on the date of loan approval.

Income Tax Benefits on Home Loans in the New Income Tax Regime

In the updated income tax return policy, exemptions on the interest paid for a self-occupied property are no longer available under section 24. Furthermore, since deductions under section 80C are not allowed in the new tax regime, you cannot claim an exemption on the principal amount either.

In simpler terms, you cannot avail exemptions on both the principal and interest paid for a home loan on a self-occupied property through the new income tax filing. However, you can still claim an exemption on the interest paid for a home loan on a rental property.

Should You Opt for the Old or New Regime?

The decision ultimately rests with you, but it's important to consider factors like your income, current EMI repayments, your tax filing segment, and other relevant aspects. 

However, regarding claiming income tax benefits on home loans, the old tax system offers greater advantages compared to the new one. It provides more flexibility and options for deductions.

Before deciding, it's wise to carefully analyze the numbers and, if necessary, seek advice from a financial expert.

Also Read: Old Tax Regime vs. New Tax Regime

Interim Budget 2024

The interim budget of 2024 brought notable changes that impacted home loan applicants, particularly concerning income tax benefits. With revisions in tax policies, applicants now face critical decisions regarding which income tax regime to opt for and its implications on home loan repayments. Understanding these changes is crucial for making informed decisions. When considering income tax benefits, individuals must weigh the advantages and disadvantages of both the old income tax regime and the new income tax regime. 

While the old income tax regime offers more flexibility and options for deductions related to home loans, the new income tax system may have its advantages in certain scenarios. 

Therefore, applicants should carefully evaluate their financial circumstances, including income levels, existing EMIs, and tax filing segments, to determine which regime aligns best with their needs and goals. Consulting with financial experts can provide valuable insights and assistance in navigating these complexities. Ultimately, selecting the appropriate tax regime can optimize tax benefits and streamline the home loan repayment process for applicants.

Disclaimer: The contents of this article are for information purposes only & not a financial advisory. For more details, please refer to the product or service document and/ or connect with our customer representative before making any financial decision. The information is subject to update, completion, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

Financing through Godrej Finance/Godrej Housing Finance Limited. Product Terms & Conditions apply, for details visit https://www.godrejcapital.com