One of the major highlights of Union Budget 2020 was the introduction of a new tax regime. The new tax regime is different from the old one in two ways – first, it has more slabs with lower tax rates. Second, major exemptions available to taxpayers in the old tax regime have been done away with in the new regime. Close to 70 exemptions in the old tax regime are not available in the new one.

As a taxpayer, you have the option of choosing between the two. However, before doing so, you need to know the nitty-gritties to understand how the choice affects the tax benefits you get when you apply for a home loan.

Tax Slab Comparison Between Old and New Tax Regime

First, let’s see the tax rates in the new and old tax regimes. The table below compares the old and new tax slabs:

As evident, in the new system, if your income is between INR 5-7.5 lakhs, you need to pay tax at 10% as against 20% in the old regime. Also, the earlier INR 10 lakhs+ slab has been broken into three parts - INR 10-12.5 lakhs, INR 12.5-15 lakhs, and above INR 15 lakhs.

Exemptions Not Allowed in the New Tax Regime

Unlike the old tax regime, the new tax regime lowers the tax rates, but you need to forgo certain exemptions offered in the former. The list below shows the exemptions and deductions that are not allowed in the new regime. These are:

• Leave Travel Allowance

   

• House Rent Allowance

   

• Conveyance Allowance

   

• Relocation Allowance

   

• Children Education Allowance

   

• Standard Deduction on Salary

   

• Interest on Housing Loan

   

• Professional Tax

   

• Deduction Under Chapter VI A which includes section 80C, 80D, 80E and so on

   

Now comes the next thing. As a Home Loan borrower, the tax regime you opt for has a profound impact on your Home Loan. Let’s see how.

Tax benefits on Home Loans in the Old Tax Regime

Tax Benefit on Principal Amount of Home Loan
First, let’s understand the Home Loan income tax rebate on the principal component of the EMI. If you have opted for the old tax regime, you can claim a deduction on the amount paid as principal under section 80C of the Income Tax Act for a self-occupied property. The maximum amount that you can claim as a deduction is INR 1.5 lakhs.

If you have a second house that is unoccupied or houses dependents such as parents, it will also be considered a self-occupied property. If you are serving Home Loan on both the homes, you are eligible for tax exemption on the principal amount of both Home Loans, capped maximum at INR 1.5 lakhs.

Additionally, stamp duty, cess, surcharge, and registration charges paid can be claimed as deduction under section 80C of the Income Tax Act. However, the total deduction allowed under Section 80C is limited to Rs 1.5 lakh.

Tax Benefit on Home Loan Interest
Home Loan income tax rebate is also applicable on the interest paid. You can claim a maximum deduction of INR 2 lakhs under section 24 in a given financial year on a self-occupied property.

If you have a second home that is unoccupied or houses dependents such as parents, you can claim a deduction on the interest paid on the second home loan under the same section. However, note that the total deduction on the interest paid on both Home Loans shouldn’t exceed INR 2 lakhs.

More Deduction on Home Loan Tax Interest for Affordable Housing
On purchasing a house under the affordable housing category, you are eligible for an additional Home Loan income tax rebate on the interest paid, which is up and above INR 2 lakhs. You can claim a deduction of INR 1.5 lakhs in a fiscal year. However, to claim this deduction, you need to fulfill the following criteria:

• You should have taken the 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

   

Tax Benefits on Home Loans in the New Tax Regime

In the new tax regime, you can’t claim exemption on the interest paid towards Home Loan for self-occupied property under section 24. Also, as deductions under 80C are not allowed in the new tax regime, it means you can’t claim exemption on the principal amount too.

To put it otherwise, you can’t claim exemption on the principal and interest paid for Home Loan for self-occupied property in the new regime. However, you can still claim exemption on the interest paid on Home loan for a rental property.

Should You Opt for the Old or New Regime?

The choice is entirely up to you and this decision depends on your income, cash flow, and liabilities. However, as far as claiming income tax on Home Loan is concerned, the old tax regime enjoys an edge over the new one. It offers more flexibility and choices.

A word of caution, before proceeding, do your math carefully and consult an expert, if required.

Godrej Capital is the financial services arm of Godrej Group which offers home loans, Loan Against Property and other secured loans. With innovative products and offerings, customers can get hassle-free loans on easy terms and conditions. Click here to know more about the offering.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to the product or service document and/or connect with our customer representative prior to making any financial decision