For those with high home loan interest payments on self-occupied properties, the old tax regime may still be beneficial due to the deductions it offers. However, if your focus is on simplicity and lower tax rates with fewer deductions, the new tax regime under Section 115 BAC might be a better fit.
Tax Benefit on Home Loan Interest: If you have an ongoing home loan and are considering reducing your tax burden, the tax regime you choose can make a significant difference. Under the old tax regime, homeowners could claim various deductions, including interest paid on home loans, to reduce their taxable income. However, under the new tax regime introduced under Section 115 BAC, these benefits are restricted. Let’s dive into the details of how the new tax regime impacts home loan interest deductions and what you need to consider.
Can You Claim Home Loan Interest Deduction Under the New Tax Regime?
Under the new tax regime (Section 115 BAC), deductions for home loan interest payments are not allowed for self-occupied properties. This means that if you own a house for personal use, you cannot claim the deduction for interest paid on the home loan. Additionally, any loss from house property under the new regime cannot be set off against income from other heads, nor can it be carried forward to future years.
How Was It in the Old Tax Regime?
In the old tax regime, you could claim a deduction of up to Rs 2 lakh on home loan interest paid for a self-occupied house. Moreover, if you incurred a loss from house property due to higher interest expenses, you could set off this loss against income from other sources, such as salary or business income, up to a limit of Rs 2 lakh. Any remaining loss could be carried forward for up to 8 years to offset future income from house property.
What is the Benefit under Let-Out Properties?
While the new tax regime does not allow deductions for self-occupied properties, you can still claim deductions on home loan interest for let-out or rented properties. There are no such restrictions on claiming deductions for interest paid on rented properties under Section 115 BAC.
For let-out properties, you can continue to claim a deduction on the interest paid, and you can set off any resulting loss from house property against your rental income. However, if the interest exceeds the rental income, and a loss is incurred, it cannot be carried forward beyond the current year.
Example to Understand the Impact:
Let’s take the case of Mr. A:
- He has taken a home loan for two properties: a self-occupied house and a let-out house.
- He paid Rs 2 lakh in interest on the self-occupied house and Rs 5 lakh on the let-out property.
- He earned Rs 8 lakh in taxable rent from the let-out house (after deducting permissible expenses).
Under the Old Tax Regime:
Mr. A could claim the entire Rs 7 lakh paid in interest (Rs 2 lakh for the self-occupied property and Rs 5 lakh for the let-out property). He would be taxed on the net rental income of Rs 1 lakh (Rs 8 lakh rent minus Rs 7 lakh interest).
Under the New Tax Regime:
- The Rs 2 lakh interest on the self-occupied house is not deductible.
- Mr. A can claim the Rs 5 lakh interest on the let-out property, reducing his taxable rent to Rs 3 lakh (Rs 8 lakh rent minus Rs 5 lakh interest).
If the rental income from the let-out property was only Rs 3 lakh, Mr. A could claim only Rs 3 lakh as an interest deduction, and the remaining Rs 2 lakh interest would lapse, with no option to carry it forward.
Key Points to Remember:
- No Deduction for Self-Occupied Properties: Under the new tax regime, you cannot claim home loan interest deductions for self-occupied properties.
- Set-Off of Losses: Losses from house property can be set off against other house property income but are limited to Rs 2 lakh when offsetting against income from other heads.
- No Carry Forward of Losses: Under Section 115 BAC, any house property loss incurred in the current year cannot be carried forward to future years.
- Let-Out Properties: You can still claim home loan interest deductions for rented/let-out properties, and set off any resulting loss against rental income, but you cannot carry forward any excess loss.
- Brought Forward Losses: If you have brought forward losses from house property under the old regime, they can be carried forward only if they pertain to a let-out property. Losses related to self-occupied property will lapse upon switching to the new regime.
Should You Choose the New Tax Regime?
Before opting for the new tax regime, it’s essential to compare your tax liability under both regimes. If you have significant home loan interest deductions or losses from house property, especially for self-occupied properties, the old tax regime may offer more substantial tax benefits.
Final Thoughts:
Choosing between the old and new tax regimes depends on your financial situation. For those with high home loan interest payments on self-occupied properties, the old tax regime may still be beneficial due to the deductions it offers. However, if your focus is on simplicity and lower tax rates with fewer deductions, the new tax regime under Section 115 BAC might be a better fit.
Consider all factors and calculate your tax liability under both regimes to make an informed decision.
To Access the Section 115 BAC of Income Tax Act Click Here
The Income Tax Act 1961 as amended by Finance Act 2024
Also Read: Notification 116/2024: Redefining Arm’s Length Price Under Section 92C of Income Tax Act
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