Old or New Tax Regime With a Home Loan: How to Choose
Income tax now runs on two parallel sets of rules, and a home loan is treated very differently in each. The new regime is the default and gives a person living in their own home no deduction for the loan. This guide compares the two regimes in rupees for home loan borrowers in Bangalore and shows how much deduction the old regime needs before it wins.
What Each Regime Allows
The old regime keeps the familiar deductions and taxes income at higher rates. The new regime removes most deductions and applies lower rates across wider slabs. The table sets out the home loan items side by side.
| Item | Old regime | New regime |
|---|---|---|
| Interest, owner-occupied home | Deductible up to Rs. 2 Lakhs a year | Nil |
| Principal, stamp duty and registration fee | Deductible within Rs. 1.5 Lakhs a year | Nil |
| Interest, rented home | Deductible in full against the rent | Deductible against the rent |
| Loss on a rented home | Up to Rs. 2 Lakhs set against salary, balance carried forward | Lapses, with no set-off against salary and no carry forward |
| Standard deduction from salary | Rs. 50,000 | Rs. 75,000 |
Other common deductions follow the same pattern. House rent allowance, health insurance premium and a person's own pension contribution reduce income only in the old regime. The employer's contribution to the National Pension System is deductible in both.
Slab Rates for Tax Year 2026-27
The Union Budget of February 2026 left the slab rates of both regimes unchanged. The rates below apply to income earned from 1 April 2026 to 31 March 2027. A health and education cess of 4% is added to the tax in both regimes.
| New regime: taxable income | Rate |
|---|---|
| Up to Rs. 4 Lakhs | Nil |
| Rs. 4 Lakhs to Rs. 8 Lakhs | 5% |
| Rs. 8 Lakhs to Rs. 12 Lakhs | 10% |
| Rs. 12 Lakhs to Rs. 16 Lakhs | 15% |
| Rs. 16 Lakhs to Rs. 20 Lakhs | 20% |
| Rs. 20 Lakhs to Rs. 24 Lakhs | 25% |
| Above Rs. 24 Lakhs | 30% |
A resident whose taxable income is Rs. 12 Lakhs or less pays no tax in the new regime because of the rebate. With the standard deduction, a salary of up to Rs. 12.75 Lakhs is free of tax. The old regime charges nil up to Rs. 2.5 Lakhs, 5% up to Rs. 5 Lakhs, 20% up to Rs. 10 Lakhs and 30% above that.
The Break-Even Deduction
The old regime wins only when total deductions are large enough to offset its higher rates. The table shows the deductions a salaried person needs, over and above the standard deduction, for both regimes to give the same tax. The figures are for an individual below 60 with salary income alone.
| Annual salary | Tax in the new regime | Deductions needed for the old regime to match |
|---|---|---|
| Rs. 15 Lakhs | Rs. 97,500 | About Rs. 5.44 Lakhs |
| Rs. 20 Lakhs | Rs. 1,92,400 | About Rs. 7.09 Lakhs |
| Rs. 30 Lakhs | Rs. 4,75,800 | Rs. 8 Lakhs |
The break-even stays at Rs. 8 Lakhs for every salary above about Rs. 25 Lakhs. A home loan on one owner-occupied flat brings Rs. 3.5 Lakhs at most: Rs. 2 Lakhs of interest and Rs. 1.5 Lakhs of principal. The loan alone therefore falls well short at each of these salary levels.
A Worked Comparison
Take a borrower with a salary of Rs. 20 Lakhs and a home loan of Rs. 75 Lakhs at 8.5%. First-year interest is about Rs. 6.32 Lakhs, of which Rs. 2 Lakhs is deductible in the old regime. The three cases below add deductions step by step.
| Deductions in the old regime | Old regime tax | New regime tax | Lower by |
|---|---|---|---|
| Home loan only: Rs. 3.5 Lakhs | Rs. 3,04,200 | Rs. 1,92,400 | New regime, Rs. 1,11,800 |
| Home loan, health insurance and pension: Rs. 4.25 Lakhs | Rs. 2,80,800 | Rs. 1,92,400 | New regime, Rs. 88,400 |
| The above plus a Rs. 4 Lakh mix of rented-home loss and other deductions: Rs. 8.25 Lakhs | Rs. 1,56,000 | Rs. 1,92,400 | Old regime, Rs. 36,400 |
The home loan deductions are worth Rs. 1,09,200 inside the old regime, yet the borrower still pays less in the new regime in the first two cases. The old regime moves ahead only when large additional deductions are added to the loan. Each borrower should run this sum with their own figures.
Who Still Gains From the Old Regime
A few profiles collect enough deductions to cross the break-even. They share one feature: the home loan is one of several large items.
- A borrower who owns a second, rented home with a loan, where the yearly loss on that home adds up to Rs. 2 Lakhs of set-off
- A borrower who pays rent in the city of work, owns a home elsewhere and claims house rent allowance along with the loan interest
- A borrower with a salary near Rs. 15 Lakhs who uses the full principal limit, health cover for parents and pension contributions
- A borrower still claiming instalments of interest paid before possession, alongside other deductions
Joint owners decide separately. Each co-owner files an individual return and picks a regime on their own numbers. One partner may stay in the old regime and claim their share of the loan, while the other takes the new regime.
A Rented Home in the New Regime
Interest on a rented home remains deductible in the new regime, but only up to the income from house property. A landlord whose rent after the 30% standard deduction is Rs. 2.5 Lakhs, with interest of Rs. 4 Lakhs, reduces the house property income to nil. The remaining Rs. 1.5 Lakhs is lost for tax purposes.
In the old regime, that Rs. 1.5 Lakhs would reduce salary income in the same year. A borrower with a large loan on a rented flat should count this difference when comparing the two regimes.
How and When the Choice Is Made
A salaried person without business income chooses afresh every year. The employer asks for the choice at the start of the financial year and deducts tax on that basis. Where an employee gives no declaration, the employer applies the new regime.
The final choice is made in the income tax return, and it may differ from the one given to the employer. The old regime is available only in a return filed by the due date, which is 31 July for most salaried people. A late return is processed in the new regime.
A person with income from business or profession has less freedom. After leaving the new regime, such a person may return to it only once, so the decision needs a longer view.
What It Means for the Buying Budget
For years, buyers counted a tax saving against the EMI when they sized a loan. That saving is now uncertain for most salaried borrowers with a single home. A sound budget treats the EMI as the full monthly cost and regards any tax relief as extra.
The comparison is also worth repeating each year, because interest falls as the loan ages and salaries rise. The EMI calculator shows the EMI for a chosen price and loan. Buyers looking at homes in areas such as Whitefield or Kanakapura Road should test the EMI against take-home pay worked out in the regime they expect to use.
