Old vs new tax regime: Should your home loan decide for you?

India Today

13-05-2025

Budget 2025 brought big changes for salaried taxpayers. With the basic exemption limit raised to Rs 12 lakh under the new tax regime, many people may now pay little or no tax, even without using any deductions. This makes the new regime attractive and much simpler to follow.But there's a catch. The new tax regime doesn't allow popular deductions like HRA, LTA, Section 80C (for investments like PPF and ELSS), or Section 80D for health insurance. One major loss is the home loan interest benefit.advertisementWHY HOME LOAN MATTERS IN OLD REGIMEAfter the 2025 Union Budget, Indian taxpayers are at a crossroads, whether to opt for the old or new tax regime.
According to CA (Dr) Suresh Surana, 'When choosing between the old and new income tax regimes, the impact of a home loan may often be a crucial factor, particularly for individuals with significant housing finance obligations.'He explained, 'Under the old regime, taxpayers are entitled to key deductions related to home loans on interest paid under Section 24(b) for a self-occupied property (restricted to Rs 2 lakhs in the case of self-occupied property, whereas no such restriction applies in the case of let out/ deemed to be let out property), and up to Rs 1.5 lakh on principal repayment under Section 80C, subject to the overall threshold limit.''Additionally, first-time homebuyers may be eligible for further deductions under Sections 80EE or 80EEA for previously availed home loans, depending on the value of the property and the amount of the loan,' mentioned Surana.WHAT THE NEW REGIME OFFERS (AND MISSES)advertisementContrastingly, the new regime brings simpler and lower tax rates. However, it takes away several key deductions, including home loan benefits.So, if you're still repaying a loan, especially in the initial years, you may find the old regime more tax-efficient. 'Those who have repaid their loans or do not claim housing loan benefits may benefit from the simplified and concessional rate structure of the new regime,' stated Surana.REBATE HIKE UNDER SECTION 87A: A GAME CHANGEROne major update under Budget 2025 is the increased rebate under Section 87A, from Rs 25,000 to Rs 60,000.'This has significantly improved its attractiveness to middle-income taxpayers. As a result, individuals with net total income of up to Rs 12 lakh benefit from the nil-tax liability under the new regime compared to the old tax regime, irrespective of the quantum of home loan interest. Therefore, for taxpayers with net total income of up to Rs 12 lakh, the new regime proves more beneficial, even if they are servicing a home loan,' said Surana.OLD REGIME GAINS EDGE BEYOND RS 12 LAKH INCOMEOnce your income crosses Rs 12 lakh, things start to shift. 'It is only when such net total income exceeds Rs 12 lakh that the deductions available under the old regime, including home loan interest, start to play a decisive role in reducing overall tax liability,' mentioned Surana.advertisementHe added, 'In such cases, the ability to claim higher deductions may outweigh the lower slab rates under the new regime, making the old regime more tax-efficient for high-income individuals with significant interest outgo on housing loans.'BEYOND HOME LOANS: OTHER CONSIDERATIONSHome loan benefits are important, but they aren't the only ones to think about. Other deductions under the old regime, like Section 80D (health insurance), Section 80G (donations) and HRA (house rent allowance), also make a difference.Surana pointed out that, 'The home loan is an important variable in the tax planning equation, but the choice between regimes should be based on a comprehensive evaluation of all relevant factors, rather than on a single benefit alone.'As per Shefali Mundra, tax expert at ClearTax, 'Your income level matters; higher earners with many deductions may save more under the old regime. Also, if you regularly invest in options like PPF, ELSS, or NPS, the old regime could work better for you. But if your focus is on keeping things simple and having more cash in hand now, the new regime may suit you more.'advertisement"Choosing between the old and new tax regimes is a nuanced decision. While home loan benefits are a significant consideration, they should be weighed alongside income levels, investment strategies, and financial objectives. Taxpayers are encouraged to conduct a comprehensive analysis or consult financial advisors to determine the most beneficial regime for their circumstances," stated Mundra.In other words, choosing the right tax regime is no longer a one-size-fits-all decision. While home loan benefits can be a major deciding factor, especially for higher earners, taxpayers must look at the bigger picture. Income level, deductions, financial goals, and investment habits all matter. The best approach? Run the numbers for both regimes and let logic, not just your loan, guide your choice.