Union Budget 2025: Expectations on Home Loan Deductions Under the New Tax Regime 

As Budget 2025-26 approaches, salaried taxpayers and homeowners are keenly watching the government for reforms that could bring much-needed relief. At the heart of these expectations lies a pressing issue the Institute of Chartered Accountants of India (ICAI) raises: the lack of provisions for home loan interest deductions under the New Tax Regime. This gap has been a significant deterrent for taxpayers contemplating shifting from the Old Tax Regime to the New. Here’s a deep dive into ICAI’s recommendations and why they hold the potential to impact millions of salaried individuals across the country.

The New Tax Regime: A Double-Edged Sword 

Introduced as part of Budget 2020, the New Tax Regime promised a simplified tax structure with lower tax rates but came at the cost of most exemptions and deductions. While this framework works for taxpayers with minimal investments, it has fallen short for those relying on deductions to manage their tax outflows—especially homeowners.

Under the Old Tax Regime, a homebuyer can claim a deduction of up to ₹2 lakh on home loan interest paid for a self-occupied property. This benefit is notably absent in the New Tax Regime, forcing many taxpayers to stick to the old framework.

While the New Tax Regime does allow deductions on home loan interest for let-out properties, the limitations are stark:

1. Loss from house property (interest exceeding rental income) cannot be offset against income from other heads.
2. Such losses cannot be carried forward for future adjustments.

This disparity places homeowners at a disadvantage and reduces the appeal of the New Tax Regime for middle-class taxpayers who often finance their homes through loans.

Why Home Loan Interest Deduction Matters 

For most salaried individuals, purchasing a home is necessary and a significant financial commitment. Home loans bridge the gap between aspirations and affordability but come with high interest rates. The interest component during the initial years of a loan can be disproportionately large, often exceeding potential rental income for let-out properties. Without the ability to claim deductions, homeowners face higher tax liabilities, further tightening their financial situation. The ICAI has pointed out that this has adversely affected salaried individuals who depend on these deductions to make homeownership viable. This sentiment is echoed in industry reports, including one by CRISIL on the real estate sector, which highlights that tax incentives on home loans are instrumental in encouraging housing demand, especially in urban and semi-urban areas. Similarly, a National Housing Bank (NHB) study highlights the role of tax benefits in promoting housing finance, noting that any withdrawal of such benefits could dampen demand and slow down growth in the housing sector.

ICAI’s Wishlist: A Closer Look 

Recognizing the financial strain on taxpayers, the ICAI has proposed three key reforms in its pre-budget memorandum:

1. Reintroduction of ₹2 Lakh Deduction for Self-Occupied Properties 

The ICAI recommends deducting up to ₹2 lakh on home loan interest for self-occupied properties under the New Tax Regime. This move could restore balance for salaried taxpayers and make the New Tax Regime more appealing.

2. Set-Off of Losses Against Other Income

For let-out properties, the ICAI suggests allowing taxpayers to offset losses from house property (arising from excess interest payments) against income from other heads. This flexibility was a flagship feature of the Old Tax Regime and significantly relieved homeowners struggling with negative cash flows.

3. Carry Forward of Losses 

In cases with no income under other heads, the ICAI proposes permitting the carry forward of house property losses for up to eight years. This would allow taxpayers to set off these losses against future income, providing much-needed financial leeway.

Why These Changes Are Crucial 

The ICAI’s recommendations address broader economic and policy goals.

1. Encouraging homeownership 

Homeownership is a cornerstone of financial stability and social security. Tax incentives are pivotal in making homeownership achievable, especially for the middle class. By reinstating deductions under the New Tax Regime, the government would send a strong signal of support to aspiring homeowners.

2. Bridging the Gap Between Regimes 

The current dual-regime system has created confusion among taxpayers, with many opting to stick with the Old Tax Regime to maximise deductions. Aligning the benefits of both regimes could simplify decision-making and encourage greater adoption of the New Tax Regime, which is intended to be the default.

3. Stimulating the Real Estate Sector 

Real estate is a critical driver of India’s economy, contributing significantly to GDP and employment. Providing tax relief to homeowners can stimulate demand in the housing market, which has a cascading effect on allied industries like construction, cement, and steel.

A study by Knight Frank India reveals that tax incentives on home loans have historically bolstered the real estate market by incentivising first-time buyers. Restoring such deductions could rejuvenate demand and address inventory overhang in the housing sector.

4. Promoting Financial Equity 

The absence of home loan interest deductions disproportionately impacts salaried individuals, who already face limited avenues for tax savings compared to business owners or self-employed professionals. Restoring these deductions would promote greater financial equity within the tax system.

Challenges and Counterarguments 

Critics might argue that reintroducing deductions could complicate the New Tax Regime, which was designed to be straightforward. However, this concern can be mitigated by clearly defining eligibility criteria and integrating digital solutions for seamless compliance.

Others might point out that such reforms could lead to revenue losses for the government. While this is a valid concern, the long-term benefits—enhanced tax compliance, increased adoption of the New Tax Regime, and economic stimulation—far outweigh the short-term revenue impact.

What the Future Holds 

The government’s decision on this issue will impact taxpayers and set the tone for India’s evolving tax landscape. With ICAI’s recommendations gaining traction, there is hope that Budget 2025 will address this critical gap and provide relief to homeowners.

For policymakers, the challenge lies in balancing simplicity with inclusivity. The New Tax Regime’s success depends on its ability to cater to diverse taxpayer needs without becoming overly complex. A thoughtful inclusion of home loan interest deductions could be a step in the right direction.

Budget 2025-26 is a litmus test for India’s commitment to creating a tax system that aligns with the aspirations of its citizens. The ICAI’s wishlist is a roadmap for fostering financial well-being and economic growth. By addressing the concerns of homeowners, the government has an opportunity to make the New Tax Regime truly equitable and inclusive.