Budget 2026: Think New Tax Regime Has No Deductions? This Home Loan Rule Proves Otherwise

Budget 2026 is around the corner, but many taxpayers still misunderstand what the new tax regime does and doesn’t allow.

One such grey area: deductions on home loan interest. While most assume the new regime offers zero deductions, Section 24(b) still provides limited relief on interest paid for rented (let-out) properties though with important restrictions.

The new tax regime, introduced to simplify compliance, removes most exemptions and deductions. However, it is not entirely “deduction-free.” Taxpayers who have let out a property can still claim interest paid on home loans under the “Income from House Property” head, via Section 24(b). This benefit is not available for self-occupied homes.

The rules, however, are more nuanced than often portrayed.

It’s incorrect to say the deduction is strictly limited to the rental income earned. The real constraint lies in how the income or loss from house property is treated under the year’s Income Tax Act provisions and Central Board of Direct Taxes (CBDT) clarifications.

In general practice, if rental income is lower than interest paid, the resulting loss under “Income from House Property” cannot be freely adjusted against salary or other income sources in the new regime, as was possible in the old regime.

Nor can the loss usually be carried forward. This makes the deduction far less beneficial than in the past, but not entirely unusable.

If your home loan interest is Rs 5 lakh and rental income is Rs 4 lakh, you may be able to deduct Rs 4 lakh but how the remaining Rs 1 lakh is treated depends on that assessment year’s rules. In some years, limited set-off or carry-forward may still be allowed, though generally not across income heads.

If rental income exceeds interest (e.g., Rs 6 lakh rent vs Rs 5 lakh interest), you can typically deduct the full interest and pay tax on the balance.

At ITR filing, taxpayers must provide complete details: lender name, loan account number, sanction date, total interest paid, and other proof. Inaccurate or missing information can lead to rejection or notices from the department.

Under the new tax regime, home loan interest on rented properties still qualifies for deduction under Section 24(b), but with restricted benefit and limited set-off options. Taxpayers should not assume blanket caps or entitlements and should consult official guidance or professionals before relying on this provision.