One of the significant developments in the financial landscape was the introduction of a new tax regime, distinct from the old one, during the 2020 Union Budget announcement. The new tax structure features additional slabs with reduced tax rates, and it eliminates several key exemptions available in the old regime. Nearly 70 exemptions present in the old tax structure are absent in the new one.
Taxpayers are currently confronted with a choice between two tax regimes, underscoring the need to delve into the specifics. It is crucial to comprehend how this decision impacts the tax benefits associated with acquiring a home loan. Factors such as home loan interest rates and EMIs play a significant role. Additionally, it's essential to recognize how the choice of tax regime can influence your Income Tax Return (ITR) and, consequently, its impact on home loans. A comprehensive evaluation of these elements is necessary before making an informed decision about which tax regime aligns better with your financial goals and obligations.
Tax Slab Comparison Between Old and New Tax Regime
The income tax rates in both the new and old tax regimes are listed in the table below. It is a comparison of the tax slabs in the old and new structures to make e-filing of income tax return easier:
|Annual Income (in INR)
|Old Tax Rate
|New Tax Rate
As observed, under the new system, if your income falls between INR 5-7.5 lakhs, the tax rate is 10%, compared to 20% in the old regime. Additionally, the previous INR 10 lakhs+ slab has been divided into three segments - INR 10-12.5 lakhs, INR 12.5-15 lakhs, and exceeding INR 15 lakhs. This can be utilised as a reference for income tax calculations and income tax return filing, both.
Also read: Is ITR for Home Loan Required? - 2024
Exemptions Not Allowed in the New Income Tax Regime
In contrast to the old tax regime, the new tax structure reduces tax rates, but it requires you to forego specific exemptions available in the former. The following list outlines the exemptions and deductions not permitted in the new regime. This will impact income tax return calculations and e-filing. The adjustments in available exemptions should be considered while assessing the overall impact of opting for the new tax regime. Some exemptions not allowed in the new income tax regime are:
Leave Travel Allowance
House Rent Allowance
Children Education Allowance
Standard Deduction on Salary
Interest on Housing Loan
Deduction Under Chapter VI A which includes section 80C, 80D, 80E and so on
Now, let's move on to the next consideration of a suitable tax regime as a Home Loan borrower since it significantly influences your Home Loan decision and repayment. Here's how:
Income Tax Benefits on Home Loans in the Old Income Tax Regime
Tax Benefit on Principal Amount of Home Loan
Firstly, let's understand the income tax benefit for the principal part of your Home Loan's EMI. If you've picked the old tax system, you can get a deduction on the amount you've paid as the principal under section 80C of the Income Tax Act, but only for a self-occupied property. The most you can claim as a deduction is INR 1.5 lakhs. Your home loan deductions can also be calculated through a home loan EMI calculator to get a better understanding of your principle and interest break-up.
If you have another house that's empty or has family members like parents living in it, it's still seen as a self-occupied property. If you're repaying Home Loans for both houses, you can get an income tax return filing break on the principal amount for both loans, but the total maximum limit of exemption during ITR filings is INR 1.5 lakhs.
Furthermore, you can also claim a deduction during ITR filing for stamp duty, cess, surcharge, and registration charges under section 80C of the Income Tax Act. But, keep in mind, the total deduction allowed under Section 80C is capped at Rs 1.5 lakh.
Tax Benefit on Home Loan Interest Rate
You can also get a tax break on the home loan interest paid. Under section 24, if your property is self-occupied, the maximum deduction you can claim in a financial year is INR 2 lakhs. If you have a second home that's empty or has family members like parents living in it, you can also claim a deduction on the home loan interest paid for the second house under the same section. But remember, the total deduction for the interest paid on both Home Loans combined should not go beyond INR 2 lakhs.
More Deduction on Home Loan Tax Interest Rate for Affordable Housing
If you buy a house under the affordable housing category, you can get extra income tax benefits on the home loan interest paid, beyond the usual INR 2 lakhs. You can claim a deduction of INR 1.5 lakhs in a year. To be eligible for this home loan income tax exemption, you need to meet the following conditions:
You should have taken the home loan from an approved financial institution such as a housing finance company or bank.
The stamp value of the property should not be more than INR 45 lakhs.
You shouldn't own any other residential property on the date of loan sanction.
Income Tax Benefits on Home Loans in the New Income Tax Regime
Under the new income tax return policy, you can't get an exemption on the home loan interest rate paid for a self-occupied property as per section 24. Additionally, since deductions under 80C are not permitted in the new income tax regime, this means you can't claim an exemption on the principal amount either.
In simpler terms, you can't get 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 home loan interest paid on a rental property.
Should You Opt for the Old or New Regime?
While the choice completely depends on you, you need to decide based on various factors such as your income, existing EMI repayments, which segment you fall under for ITR filings, and other such factors.
But when it comes to claiming home loan income tax benefits, the old tax system is better than the new one. It gives you more options and flexibility.
Just a heads up, before you make a decision, crunch the numbers carefully, and if needed, talk to an expert.
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 prior to 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.
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