Home loan tax benefit 2026-27: ₹2 lakh interest, principal deduction and let-out property rules

For a house you live in (self-occupied), home loan interest is deductible up to ₹2,00,000 a year under section 22 of the Income-tax Act, 2025, and principal repayment counts towards the ₹1.5 lakh investment deduction under section 123. Both are available only in the old regime. For a let-out house, interest is deductible against the rent in both regimes, without the ₹2 lakh cap. In the new regime, though, a loss from house property cannot be set off against salary or carried forward. In the old regime, a house property loss can reduce other income by up to ₹2 lakh a year, and the rest is carried forward. Interest paid before construction is completed is claimed in five equal instalments starting from the year the house is completed.

How house property income is computed

Step	Self-occupied house	Let-out house
Annual value	Nil (for up to two self-occupied houses)	Rent received or receivable, less municipal taxes paid
Standard deduction	Not applicable	30% of annual value
Interest on borrowed capital	Up to ₹2,00,000 (old regime only)	Full interest, no cap
Result	Usually a loss equal to the interest claimed	Rent income or a loss
Set-off of a loss against salary	Old regime: up to ₹2 lakh	Old regime: up to ₹2 lakh; new regime: not allowed

The ₹2 lakh limit for a self-occupied house applies if the loan was taken to buy or build the house, the work is completed within five years from the end of the tax year in which you borrowed, and you have a certificate from the lender. Otherwise, for example for a loan taken for repairs, the cap is ₹30,000.

Worked example: self-occupied flat, old regime

Illustrative loan of ₹50 lakh at 8.5% for 20 years. EMI ≈ ₹43,391. In the first full year:

Interest paid ≈ ₹4,21,000 → deductible ₹2,00,000 (cap).
Principal repaid ≈ ₹99,500 → counts under section 123, along with PF and other investments, within ₹1,50,000.

If you are in the 30% slab and your other section 123 items already total ₹50,000, the extra deduction from this loan is ₹2,00,000 + ₹99,500 = ₹2,99,500. That saves ₹2,99,500 × 31.2% ≈ ₹93,400. Check whether this, together with your other claims, clears the break-even in the old vs new regime comparison. At ₹20 lakh gross salary you need about ₹7.1 lakh of claims in total, so a home loan alone often does not tip the balance.

Worked example: let-out flat, new regime

Rent ₹2,40,000 a year; municipal tax ₹10,000; interest ₹3,00,000.

Annual value = ₹2,40,000 − ₹10,000 = ₹2,30,000.
Less 30% standard deduction = ₹69,000 → ₹1,61,000.
Less interest ₹3,00,000 → loss of ₹1,39,000.

In the new regime, the house property income is taken as nil and the ₹1,39,000 loss is lost: it cannot reduce salary and cannot be carried forward. In the old regime, the whole ₹1,39,000 could be set off against salary in the same year. If the rent were higher than the interest, both regimes would tax the net rent the same way.

Pre-construction interest

If you pay interest while the house is under construction, you cannot claim it in those years. Add up interest from the date of borrowing until 31 March before the year in which construction completes. Claim one-fifth of it each year for five years, starting with the year of completion. This share counts within the ₹2 lakh cap for a self-occupied house; the Finance Act, 2026 made this explicit in section 22(2) from tax year 2026-27.

Example. Interest during construction (2023-24 to 2025-26) totals ₹3,00,000, and the flat is completed in tax year 2026-27. You claim ₹60,000 a year for 2026-27 to 2030-31, plus the interest actually paid in each year, subject to the cap.

Joint home loans

Each co-borrower who is also a co-owner can claim interest up to ₹2 lakh and principal within their own ₹1.5 lakh, in proportion to their share of repayment.
A co-borrower who is not a co-owner generally cannot claim.
Keep the lender's certificate showing each borrower's share, and pay EMIs from each person's own account where possible.

For a couple who both choose the old regime, this can double the benefit. If one spouse is better off in the new regime, only the other claims.

Other points to know

Stamp duty and registration paid in the year of purchase count under section 123.
Selling within five years: if you sell the house within five years from the end of the year you acquired it, principal deductions claimed earlier are added back to income in the year of sale.
Older special deductions for first-time buyers (formerly 80EE and 80EEA, now sections 130 and 131) applied only to loans sanctioned within fixed windows that have closed. Existing borrowers who already qualified should check whether they can continue.
Top-up loans used for repairs or renovation can be claimed within the ₹30,000 limit for a self-occupied house, with proof of use.

Related guides: deductions under the 2025 Act, HRA exemption, and the worked examples. For EMI and balance-transfer maths, use a home-loan EMI calculator.

When to consult a professional

Get advice for under-construction properties with long delays (more than five years), properties owned jointly with unequal shares, or where you claim HRA and home loan interest in the same city.

Frequently asked questions

Can I claim interest on a self-occupied house in the new regime?

No. Section 202(2) disallows it. Only interest on a let-out property, against its rent, is allowed.

What if I own three houses?

Two can be treated as self-occupied with nil annual value. The third is treated as let out, and a notional rent is taxed even if it is empty.

Is the processing fee deductible?

Processing fees on a home loan are generally treated as interest for this purpose, within the same limits.

Sources

Income Tax Department: sections 21, 22 and 123 of the Income-tax Act, 2025
National Housing Bank: housing finance information
Income Tax e-filing portal: house property schedule in the return