A Bengaluru engineer bought a flat in Sarjapur with a 60 lakh loan and spent his first tax filing season assuming the entire year's interest, close to 5 lakh, would come off his taxable income. It did not. He had chosen the new tax regime for its lower slab rates, and the deduction he was counting on for his self occupied home was not available to him there. The mistake cost him nothing illegal, only money, and it is one of the most common misunderstandings among first time buyers in the city.

The short answer. Under the old tax regime, interest on a housing loan for a self occupied property is deductible under Section 24(b) up to 2,00,000 rupees for loans taken on or after 1 April 1999 for construction or purchase, and repayment of principal qualifies under Section 80C within a combined limit of 1,50,000 rupees. For a let out property the interest is deductible at actual value without any limit, but the loss you can set off is restricted. The trade off: the regime with the lower slab rates is not automatically the cheaper one once these housing deductions are counted.

How much home loan interest can you deduct?

For a self occupied home under the old regime, up to two lakh rupees a year. The Income Tax Department states on its official guidance for individual taxpayers that for loans taken on or after 1 April 1999 for construction or purchase of house property, the deduction limit is 2,00,000 rupees. That figure is a ceiling on the deduction, not on the interest you actually pay, and most Bengaluru borrowers on a substantial loan will pay considerably more interest than this in the early years.

There is a smaller, separate figure that catches people out. Where the loan taken on or after 1 April 1999 is for repairs of a self occupied property rather than for its construction or purchase, the Department states the allowable deduction is 30,000 rupees. A top up loan taken to renovate a home is therefore treated very differently from the original purchase loan, which is worth knowing before you assume a renovation loan carries the same benefit.

Does the deduction survive under the new tax regime?

Not in the same way, and this is where the real money is won or lost. The Department's guidance distinguishes clearly between property that is self occupied and property that is let out, and treats them differently across the two regimes. For a let out property it records the interest deduction as actual value without any limit under both regimes, while the restrictions that matter appear in what you can do with a resulting loss.

The practical consequence for a buyer with one home they live in is significant. If your entire tax planning assumed a two lakh deduction, switching regimes without recalculating can quietly remove the benefit you were relying on. Before you choose a regime in any year, run the numbers both ways with your actual interest certificate in hand rather than relying on a rule of thumb from a colleague whose loan and income look nothing like yours.

This is a decision you revisit rather than settle once. Your interest outgo falls over the life of a loan, your income usually rises, and the balance between lower slab rates and housing deductions can tip from one year to the next. A borrower for whom the old regime is clearly better in year two may find the calculation much closer in year eight, when the interest component of the EMI has shrunk. Treating the regime choice as an annual calculation, made on your own numbers, is the only reliable way to get it right.

What happens when the property is let out?

The interest deduction becomes uncapped, but the loss you can use is limited. Under the old regime, the Department states that for a let out property the interest is deductible at actual value without any limit, but the maximum loss allowed to be set off during the assessment year is 2,00,000 rupees against other heads of income, with the balance permitted to be carried forward to future years up to eight assessment years.

Under the new regime the position is stricter. The Department records that the interest is again actual value without any limit, but that a loss under the head income from house property cannot be set off against any other head, and cannot be carried forward to further years. That is a meaningful difference for anyone buying a second property in Bengaluru with the intention of letting it out.

Read that final row carefully if you are stretching to buy a rental property. A loss you cannot carry forward is a loss that simply disappears, rather than one that shelters income in a later year when rents have risen.

What about the principal you repay?

Principal repayment is a separate benefit under a separate section. The Department's guidance lists housing loan principal as an eligible item under Section 80C in the old regime, within a combined deduction limit of 1,50,000 rupees that it shares with other qualifying items such as life insurance and other investments. The word combined is the one that matters.

Most salaried buyers in Bengaluru have already used a large part of that 1,50,000 limit before their home loan is even considered, through provident fund contributions and insurance premiums. If your existing commitments already fill the limit, the principal component of your EMI may deliver no additional deduction at all. Working out how much headroom you actually have is a more useful exercise than assuming the full principal is deductible.

The shape of an EMI makes this worth revisiting over time. In the early years of a long loan, most of each instalment is interest and relatively little is principal, so the Section 80C side of the benefit starts small and grows as the loan matures. By the time the principal component is large enough to matter, many borrowers have also taken on other commitments that compete for the same 1,50,000 rupee limit. Checking the split on your annual interest certificate each year, rather than assuming last year's position still holds, is the habit that keeps the planning accurate.

How should this change the way you plan a purchase?

Treat the tax benefit as a modest offset, not as a reason to borrow more. Buyers sometimes justify a larger loan on the basis that the interest is deductible, which reverses the logic: a deduction reduces the cost of interest you were going to pay anyway, it does not make additional borrowing free. The affordability question is settled by your income and obligations, not by the tax code.

Work out your borrowing capacity first using the approach in our guide to home loan eligibility, LTV and FOIR, then treat any deduction as a secondary benefit on top. Pair that with the rate side of the equation, covered in our explainer on home loan EMI and the repo rate, because a small difference in interest rate usually outweighs the tax effect over the life of a loan.

What records should you keep for the claim?

The interest certificate above all. Your lender issues an annual statement splitting your repayments into interest and principal, and that document is the basis of both the Section 24(b) and the Section 80C claims. Keep it with your filing records for the year rather than treating it as a routine email to be deleted.

Keep the loan sanction letter and the possession or completion documentation as well, since the purpose of the loan and the status of the property both affect the treatment. If you are comparing specific developments while planning the purchase, project level detail such as our coverage of Prestige Forest Edge on Kanakapura Road helps you fix a realistic price and loan size before you model any of the tax outcomes.

A tax planning checklist for home buyers

Work through these seven steps before you file, and ideally before you borrow.

1. Confirm whether the property is self occupied or let out for the year in question.
2. Collect the lender interest certificate showing the interest and principal split.
3. Check whether your loan was taken for purchase or construction, or for repairs.
4. Calculate your position under both tax regimes using your actual figures.
5. Work out how much of the 1,50,000 rupee limit is already used by other items.
6. For a let out property, check the set off and carry forward rules for your regime.
7. Keep the sanction letter, interest certificate, and filing records together.

Doing this once, properly, is usually worth more than any amount of general advice, because the right answer depends on numbers that are specific to you.

Frequently asked questions

How much home loan interest is deductible for a self occupied house? The Income Tax Department states that for loans taken on or after 1 April 1999 for construction or purchase of house property, the deduction limit under the old regime is 2,00,000 rupees. Where the loan was taken for repairs of a self occupied property, the allowable deduction is 30,000 rupees.

Is home loan interest deductible on a let out property? Yes, at actual value without any limit. The Department records this for both regimes, but the treatment of any resulting loss differs. Under the old regime the loss set off against other heads is capped at 2,00,000 rupees in the year, with the balance carried forward up to eight assessment years.

Can I carry forward a house property loss in the new regime? No. The Department states that under the new regime a loss under the head income from house property cannot be set off against any other head in schedule CYLA and cannot be carried forward to further years. This is an important difference for buyers planning to let out a second property.

Does my home loan principal give a separate deduction? Housing loan principal is listed as an eligible item under Section 80C in the old regime, within a combined limit of 1,50,000 rupees shared with other qualifying items. If provident fund and insurance already use that limit, the principal may add no further deduction, so check your headroom first.

Last updated 2026-07-25. PropNewz Team.