Home Loan and Income Tax: Old Regime or New Regime for Tax Year 2026-27?

Anyone repaying a home loan in Bangalore now files income tax under one of two systems, and they disagree sharply about the loan. The newer one applies unless the taxpayer opts out, and for a self-occupied home it gives nothing for the interest paid. What follows works through both systems in rupees, so a borrower can see how much deduction the older one needs before it comes out ahead.

In Short

A salaried borrower with a single home frequently pays less tax under the new system, even though it ignores the loan. The older system wins only when the loan is accompanied by a good many other large deductions. The sections below give the arithmetic.

What the Loan Is Worth Under Each System

The older system keeps the deductions people are used to and applies steeper rates. The newer one discards most deductions in exchange for lower rates spread over wider bands. For a home loan, the two compare as follows.

Interest on the home the owner lives in is deductible to a ceiling of Rs. 2 Lakhs per year in the older system and not at all in the newer one. Repayment of principal, along with stamp duty and registration charges, can claim a combined Rs. 1.5 Lakhs per year, again only in the older system.

For a home that is rented out, interest offsets the rental income under both. The leftover loss is treated differently, since the older system lets Rs. 2 Lakhs of it be adjusted against salary and carries any balance into later years, while the newer system lets it lapse. The newer system's standard deduction on salary is Rs. 75,000, against Rs. 50,000 in the older one.

Rent allowance, health insurance premiums and one's own pension contributions matter only in the older system. An employer's payments towards the National Pension System are allowed under either.

Slab Structures This Year

February 2026's Union Budget left both slab structures untouched. They govern income earned between 1 April 2026 and 31 March 2027, and a 4% health and education cess is added over the tax in each.

The newer system begins taxing after Rs. 4 Lakhs. The next four bands, each Rs. 4 Lakhs wide, are charged at 5%, 10%, 15% and 20%, and the band between Rs. 20 and Rs. 24 Lakhs carries 25%. Whatever exceeds Rs. 24 Lakhs faces 30%.

The older system exempts the first Rs. 2.5 Lakhs and then charges 5% between Rs. 2.5 and Rs. 5 Lakhs, 20% between Rs. 5 and Rs. 10 Lakhs and 30% on the rest. A resident with taxable income not above Rs. 12 Lakhs owes nothing in the newer system, thanks to the rebate. Once the standard deduction is added, a salary can reach Rs. 12.75 Lakhs before any tax arises.

Finding the Tipping Point

The older system's higher rates must be offset by deductions before it wins. These examples are for an individual under 60 whose income is salary alone, and the deductions mentioned are those required in addition to the standard deduction.

• On a salary of Rs. 15 Lakhs, the newer system charges Rs. 97,500, and close to Rs. 5.44 Lakhs of deductions make the older system equal
• On Rs. 20 Lakhs, the newer system charges Rs. 1,92,400, and roughly Rs. 7.09 Lakhs of deductions are needed
• On Rs. 30 Lakhs, the charge is Rs. 4,75,800, and the requirement is Rs. 8 Lakhs

Beyond a salary of around Rs. 25 Lakhs, the requirement stays fixed at Rs. 8 Lakhs. Rs. 3.5 Lakhs is the most a single self-occupied flat can produce: interest of Rs. 2 Lakhs plus principal of Rs. 1.5 Lakhs. Against these requirements, the loan alone is short by a wide margin.

A Borrower Earning Rs. 20 Lakhs

Take someone drawing Rs. 20 Lakhs a year who has borrowed Rs. 75 Lakhs at an 8.5% rate. Interest in the first year is close to Rs. 6.32 Lakhs, yet the older system recognises only Rs. 2 Lakhs of it. Under the newer system, the tax stays at Rs. 1,92,400 whatever else happens.

Claiming just the loan gives Rs. 3.5 Lakhs of deductions and an older-system tax of Rs. 3,04,200, which is Rs. 1,11,800 more than the newer figure. Health insurance and pension lift the deductions to Rs. 4.25 Lakhs and lower the tax to Rs. 2,80,800, still Rs. 88,400 above.

A further Rs. 4 Lakhs from a loss from a let-out home plus other items takes deductions to Rs. 8.25 Lakhs. The older-system tax then falls to Rs. 1,56,000, making it Rs. 36,400 cheaper than the newer system. The saving the loan generates in the older system is Rs. 1,09,200, but it does not carry the day alone, so each borrower should repeat the exercise with real numbers.

Who Might Still Prefer the Older System

Certain situations pile up deductions beyond the tipping point, and in each the home loan is only one large item among several:

• A second home that is let out and carries a loan, whose yearly loss gives set-off of Rs. 2 Lakhs
• A person renting near the workplace while owning a home in another city, claiming rent allowance as well as interest
• A salary around Rs. 15 Lakhs paired with the full principal limit, parents' health cover and pension contributions
• Interest paid before possession, claimed in instalments alongside other deductions

Co-owners decide separately, because each files an individual return. One partner can stay with the older system and claim a portion of the loan; the other can take the newer system.

What Happens to a Rented-Out Home

For a let-out home, the newer system still allows interest, capped at the income from that property. Say 30% of rent is taken off as standard deduction, leaving Rs. 2.5 Lakhs, while the interest bill is Rs. 4 Lakhs. Income from the property becomes nil, and the other Rs. 1.5 Lakhs has no tax value.

In the older system the surplus of Rs. 1.5 Lakhs could lower that year's salary income. That difference is worth counting for anyone carrying a large loan on a let-out flat.

How the Selection Works

A salaried person with no business income chooses again every year. At the beginning of each financial year employers ask, then deduct tax accordingly, and the newer system applies when no declaration arrives.

The choice that finally counts is the one made in the return, which can differ from what the employer was told. The older system is reachable only if the return reaches the tax office before its deadline, usually 31 July for salaried individuals. Returns filed late default to the newer system. A person with business or professional income can return to the newer system only once after leaving it, which makes that decision one to take with a longer horizon in mind.

Setting the Budget

For years buyers subtracted an expected tax saving from the EMI while sizing a loan. Where a salaried borrower has just one home, that saving is now doubtful. A prudent budget counts the whole EMI as the monthly outgo and regards tax relief as a bonus.

Repeating the comparison each year makes sense, because the interest portion shrinks over time while pay tends to rise. The EMI calculator gives the instalment for any combination of price and loan. Anyone shortlisting homes in Whitefield or on Kanakapura Road should test that instalment against take-home pay in the system they expect to use.