Tax Saving Tips: Can Buying a Home on Loan Help You Save on Taxes? Here's What Experts Say

Many high-income taxpayers wonder whether purchasing a house through a home loan can help reduce their tax burden. According to financial experts, the answer depends on several key factors — including which income tax regime you choose and how you utilize the available deductions.

Understanding the Two Tax Regimes

India currently has two income tax regimes — the old regime (which allows various deductions and exemptions) and the new regime (which offers lower tax rates but minimal deductions).

Tax expert and CFP Balwant Jain explains that the first step for any taxpayer should be to evaluate which regime is more beneficial for their income level. For many high-income earners, the new tax regime tends to be more advantageous, especially for those who do not have significant deductions to claim.

However, if you find that the old regime is more suitable for your situation, you can claim multiple deductions — including ₹1.5 lakh under Section 80C (for investments like PF, ELSS, or life insurance) and an additional ₹50,000 under Section 80CCD(1B) if you contribute to the National Pension System (NPS).

Home Loan Deductions Under Section 24

When it comes to saving taxes through home loans, Jain points out an important distinction. If you buy a home on loan and rent it out, the income from rent is taxed under the head ‘Income from House Property.’

In such cases, you are allowed:

• A 30% standard deduction on rental income, and

• A full deduction on the interest paid on your home loan under Section 24 — with no upper limit if the property is rented out.

This means that a taxpayer in the highest income bracket can substantially reduce taxable income by claiming the full amount of interest paid as a deduction.

Restrictions in the New Tax Regime

However, there’s a crucial catch. If you opt for the new tax regime, you cannot set off losses from ‘Income from House Property’ against income from other sources such as salary or business.

In contrast, under the old regime, you can offset up to ₹2 lakh per year of such losses against other income. Any remaining loss can be carried forward for up to 8 assessment years, but it can only be adjusted against future income from house property.

So, taxpayers planning to use home loan deductions as a tax-saving strategy may find the old regime more beneficial, depending on their overall financial structure.

Deductions on Principal Repayment

Under the old regime, taxpayers can also claim deductions for the principal repayment of the home loan under Section 80C, up to ₹1.5 lakh per financial year.

However, this benefit does not apply to commercial properties. If you buy a shop or office space, you can claim deductions only on the interest portion, not on the principal repayment.

Should You Buy Property Just to Save Tax?

While buying a home can help reduce tax liability and simultaneously build a valuable asset, Jain advises taxpayers not to purchase property solely for tax-saving purposes.

A home loan is a long-term financial commitment that affects your cash flow for years. Therefore, it’s essential to make such a decision based on personal financial goals, stability of income, and future plans, rather than focusing purely on tax benefits.

In essence, while the home loan deduction under Section 24 can indeed help high earners save tax, the extent of benefit depends on your chosen tax regime and how strategically you plan your investments.

Key Takeaways:

• Evaluate both tax regimes before deciding where you’ll benefit more.

• Under the old regime, you can claim deductions for both interest and principal repayments.

• The new regime disallows several deductions, including set-off of house property losses.

• Tax savings should not be the sole reason for taking a home loan.

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