How to Use Home Loan Interest and Rental Income Set-Off to Reduce Tax Liability Under the New Tax Regime (FY 2025–26)"
Learn how home loan interest and rental income set-off can reduce your tax liability under the new tax regime in FY 2025–26.
Post last updated: April 28, 2025
The new tax regime (which has been the default since FY 2025–26) offers lower tax slabs, but it does not allow a lot of traditional deductions. Despite this, there is still a clever way to reduce your tax bill—by offsetting home loan interest against rental income.
When used correctly, this strategy can lower your taxable income significantly and help you save on taxes.
Key Updates for FY 2025–26
- Standard Deduction raised to ₹75,000 for salaried and pensioned individuals.
- Section 87A rebate increased to ₹60,000, available for taxable incomes up to ₹12 lakh.
- Limited deductions are allowed (such as for home loan interest), but others like 80C, HRA, and insurance are no longer valid under the new regime.
- Home Loan Interest paid on rented properties can still be deducted under Section 24(b) of the Income Tax Act.
What is the Home Loan Interest and Rental Income Set-Off?
It’s a simple method to reduce your taxable income:
- Rental income is added to your total income.
- You subtract the home loan interest you’ve paid from this rental income.
- If the interest exceeds the rent, the resulting loss from house property can be adjusted against your other income (like salary or business profits), up to ₹2 lakh.
✅ Maximum allowable deduction for home loan interest is ₹2 lakh annually, under the new tax regime.
Real Example for FY 2025–26
Let’s assume:
- Annual Salary: ₹20,00,000
- Home Loan Interest: ₹2,50,000
- Rental Income: ₹1,00,000 (₹8,333 per month)
- Standard Deduction: ₹75,000
Step 1: Calculate Net Rental Income
Rental income – Home loan interest paid =
₹1,00,000 – ₹2,50,000 = -₹1,50,000 (loss)
This results in a house property loss of ₹1,50,000.
Step 2: Adjust the Loss with Salary Income
- Gross Salary: ₹20,00,000
- Less: Standard Deduction: ₹75,000
- Net Salary: ₹19,25,000
- Less: House Property Loss: ₹1,50,000
- Taxable Income: ₹17,75,000
Step 3: Tax Calculation and Savings
Without Rental Income Set-off:
| Income Component | Amount |
|---|---|
| Gross Salary | ₹20,00,000 |
| Standard Deduction | ₹75,000 |
| Taxable Income | ₹19,25,000 |
| Tax Payable (approx.) | ₹3,00,000 (before cess) |
With Rental Income Set-off:
| Income Component | Amount |
|---|---|
| Gross Salary | ₹20,00,000 |
| Standard Deduction | ₹75,000 |
| House Property Loss | ₹1,50,000 |
| Taxable Income | ₹17,75,000 |
| Tax Payable (approx.) | ₹2,55,000 (before cess) |
Tax Savings:
By applying the home loan interest set-off, you save ₹46,800 on taxes (including cess).
Tax Slabs for FY 2025–26
| Income Range | Tax Rate |
|---|---|
| ₹0 – ₹3 lakh | 0% |
| ₹3 lakh – ₹6 lakh | 5% |
| ₹6 lakh – ₹9 lakh | 10% |
| ₹9 lakh – ₹12 lakh | 15% |
| ₹12 lakh – ₹15 lakh | 20% |
| Over ₹15 lakh | 30% |
✅ Standard Deduction: ₹75,000
✅ Section 87A Rebate: ₹60,000 for taxable income ≤ ₹12 lakh
Key Takeaways for FY 2025–26
| Aspect | Rule (FY 2025–26) |
|---|---|
| Home loan interest deduction | ✅ Up to ₹2 lakh (Section 24) |
| Principal repayment under 80C | ❌ Not allowed in new regime |
| Carry forward of house loss | ❌ Not allowed in new regime |
| Rental income disclosure | ✅ Mandatory |
| Standard Deduction | ✅ ₹75,000 |
| Section 87A Rebate limit | ✅ ₹60,000 (income ≤ ₹12 lakh) |
How to Maximize Your Savings
- 📝 Create an official rent agreement (even for relatives or friends).
- 🏠 Set a reasonable rent (₹8,000–₹10,000/month works well).
- 📜 Collect proof of rental income, such as bank transfers or receipts.
- 📄 Obtain a Home Loan Interest Certificate from your lender.
- 🧾 Accurately declare rental income in your income tax return (ITR).
Common Questions (FY 2025–26)
Q1: Can I still claim 80C for home loan principal repayment?
❌ No. 80C deductions are not available under the new tax regime.
Q2: What if my property is vacant?
⚠️ You must still show notional rent on your vacant property.
Q3: Can I carry forward my house property loss?
❌ Under the new tax regime, you cannot carry forward the loss.
Q4: How does Section 87A rebate of ₹60,000 apply?
✅ If your taxable income is ₹12 lakh or less, you are eligible for a ₹60,000 tax rebate, making your tax liability zero for incomes up to ₹12.75 lakh.
Conclusion
Despite the limitations on traditional deductions, leveraging home loan interest deductions and rental income set-off remains a smart strategy under the New Tax Regime (FY 2025–26):
🏡 Rent your property
💸 Claim home loan interest deductions
📉 Reduce taxable income
💰 Save ₹47,000 or more every year
Have questions or need support? Feel free to reach out to us!
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