Have a home loan? You may want to opt for the old tax regime

• If you have a home loan you can claim both maximum principal and interest rate deductions, you can save more taxes under the old tax regime.
  
  
• Consider consolidated deductions before making a decision.
  
  
• Key in your details and available deductions in a tax calculator to know which regime is more suitable.
  

Budget 2023-24 tweaked slabs under the new tax regime and also made it the default tax regime. So, if one wants to stay in the old tax regime and take the benefit of various deductions available, they need to opt for the old tax regime. Employers have now set deadlines for employees to register their choice of a tax regime by the end of April, so those who want to opt for the old tax regime, need to decide soon.

While tweaked tax slabs has made the new tax regime more attractive, especially since one does not have to go through the hassle of claiming deductions, when you have a home loan, there is still merit in the old tax regime.

A home loan can significantly affect your eligible tax deductions

The decision to move to the old tax regime from the new tax regime should be based on a thorough analysis of your overall tax liability under both regimes. “While the new tax regime offers lower tax rates, it does not provide certain deductions and exemptions that are available under the old tax regime, including deductions under section 80C for home loan principal repayment,” says Atul Monga, chief executive officer and co-founder, Basic Home Loan.

Under the old tax regime, you can also claim a deduction up to ₹2 lakh on the interest of your home loan if you are self-occupying the house. This will tilt your decision in favour of the old tax regime.

“The taxpayer's home loan status has a significant impact on the decision between the old and new tax regimes. The highest amount of home loan interest that can be claimed against any other income, including salary, is ₹2 lakh. If a taxpayer has a home loan, as well as an 80C deduction of ₹1.5 lakh and a standard deduction of ₹50,000, they can save more money on taxes under the old tax regime,” says Suneel Dasari, founder and CEO Eztax.in, a tax filing portal.

Consider consolidated deductions before making a decision

“You can’t look at just the home loan interest and the principal repayments standalone because the consolidated deductions are to be seen to see whether one regime works better or the other. The level of income also needs to be considered,” says Tapati Ghose, partner, Deloitte India.

Let us consider a situation when you do not have any other deduction, but just a home loan for self-occupied property where you can claim ₹2 lakh deduction as interest payment and ₹1.5 lakh as deduction under section 80C on principal repayment.

“Here, if you have an income of ₹8 lakh (before considering the standard deduction of ₹50,000, which is available both under the old and new regime), then at a deduction of more than ₹1,62,500, the old regime becomes more beneficial. At ₹10 lakh income, ₹2.5 lakh is the threshold beyond which the old regime becomes more beneficial. At ₹15 lakh, ₹3.58 lakh is the threshold beyond which the old tax regime becomes more beneficial,” says Ghose.

Also, in another example, let us consider annual incomes of ₹15 lakh and ₹20 lakh and deduction of ₹2 lakh for interest payment on a home loan under the old tax regime. If we also factor in ₹20,000 as house rent allowance (HRA) deduction, ₹50,000 as standard deduction, ₹1.5 lakh as deduction under section 80C, and a deduction of ₹50,000 under section 80D, one ends up paying ₹19,420 and ₹14,040 less tax respectively when compared to the new tax regime.

“Especially in the initial years of taking a home loan, the interest payments are very high and I would have the capacity to exhaust the ₹2 lakh limit, then I would definitely go for the old regime. But as we go towards the end of the tenure of the housing loan, then the interest comes down. Then one needs to look at their income levels and see these thresholds where the old regime is more beneficial,” says Ghose. There are calculators available online where you can key in all the required details and available deductions to arrive at a decision.

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