How to Use Home Loan Interest and Rental Income Set-Off to Reduce Tax Liability Under the New Tax Regime (FY 2025–26)"

Starting FY 2025–26, India’s new tax regime has become the default option for taxpayers.
It features lower tax rates, but restricts most traditional deductions that were earlier available under the old system.

Even so, there’s one legitimate and effective way to reduce your taxable income — by adjusting your home-loan interest against rental income.
If done properly, this can bring down your tax liability quite a bit.

---

🔹 What’s New for FY 2025–26

• Standard deduction: ₹75,000 for salaried and pensioned individuals ✅
• Section 87A rebate: ₹60,000 for incomes up to ₹12 lakh ✅
• Deductions such as 80C, HRA, LTA, and insurance premiums are ❌ not applicable under the new regime
• Interest on home loans for rented properties remains ✅ deductible under Section 24(b)
• The new regime (Section 115BAC) is now the default tax system

---

🏠 Understanding the Home-Loan Interest & Rental Income Set-off

Under Section 24(b) of the Income Tax Act, taxpayers can claim a deduction for interest paid on a home loan used to buy, build, or repair a property that is let out on rent.

Here’s how it works:

1. Add up your gross rental income for the year.
2. Deduct the interest paid on your home loan for that property.
3. If the interest amount is higher than the rent received, the difference becomes a loss from house property.
4. You can adjust this loss against other income sources (like salary or business income), up to ₹2 lakh per year.
5. Any loss beyond ₹2 lakh can be carried forward for up to 8 years and used to offset future rental income.

⚠️ Note: Under Section 115BAC (new regime), some restrictions apply on loss set-off and carry-forward. Consult a tax professional if your situation is complex or if your total loss exceeds ₹2 lakh.

---

💡 Practical Example (FY 2025–26)

Let’s look at a simple example to see how this works.

Component	Amount
Annual Salary	₹20,00,000
Home-Loan Interest	₹2,50,000
Rental Income	₹1,00,000
Standard Deduction	₹75,000

---

Step 1: Calculate Net Rental Income

Rental Income – Home Loan Interest = ₹1,00,000 – ₹2,50,000 = (₹1,50,000)

This gives you a loss of ₹1.5 lakh from house property.

---

Step 2: Adjust This Loss Against Salary

Particular	Amount
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: Compute Tax as per New Slabs

Income Range	Tax Rate
₹0 – ₹4 lakh	0%
₹4 – ₹8 lakh	5%
₹8 – ₹12 lakh	10%
₹12 – ₹16 lakh	15%
₹16 – ₹20 lakh	20%
₹20 – ₹24 lakh	25%
Above ₹24 lakh	30%

Tax before cess:

Scenario	Taxable Income	Approx. Tax
Without set-off	₹19,25,000	₹1,85,000
With set-off	₹17,75,000	₹1,55,000
Tax Saved		₹30,000
Add 4% cess		Net Saving ≈ ₹31,200

✅ In short: Claiming your home-loan interest set-off can save you around ₹31,000 a year.

---

🔹 Quick Summary of Section 24(b)

Provision	Available Under New Regime?	Remarks
Interest on home loan (for rented property)	✅ Yes, up to ₹2 lakh	Deductible from “Income from House Property”
Principal repayment (Sec 80C)	❌ No	Not available under new regime
Carry forward of house-property loss	⚠️ Limited	Only against future rental income
Rental income disclosure	✅ Mandatory	Even if rented to relatives
Standard deduction	✅ ₹75,000
Section 87A rebate	✅ ₹60,000 for income ≤ ₹12 lakh

---

Simple Tips to Maximize Tax Savings

• 📝 Always have a registered rent agreement, even with relatives.
• 🏠 Keep the rent amount realistic, typically between ₹8,000–₹10,000 a month.
• 📜 Maintain bank records or rent receipts as proof of rent received.
• 🧾 Request a Home Loan Interest Certificate from your bank or lender.
• 📄 Disclose your rental income and interest deduction correctly while filing ITR.

---

❓ Commonly Asked Questions

Q1. Can I claim 80C benefits for loan principal repayment?
❌ No. Deductions under Section 80C aren’t available in the new tax regime.

Q2. What happens if my property remains vacant?
⚠️ If you own more than one house, you may still need to declare notional rent for the vacant property.

Q3. Can I carry forward the loss from house property?
✅ Yes, but only to set off against future “income from house property” — subject to Section 115BAC restrictions.

Q4. How does the ₹60,000 rebate under Section 87A work?
✅ If your taxable income is up to ₹12 lakh, you get a rebate of ₹60,000, effectively making income up to ₹12.75 lakh tax-free.

---

🧾 Key Takeaway

While the new tax regime has phased out many popular deductions,
the home-loan interest set-off remains a smart, compliant, and often-overlooked way to reduce your taxes.

✅ Rent out your property
✅ Claim your loan interest deduction under Section 24(b)
✅ Lower your taxable income
💰 Save ₹30,000–₹35,000 every year — effortlessly

---

Disclaimer:
Tax laws are updated regularly. Always check the latest circulars or seek advice from a Chartered Accountant before filing your returns under Section 115BAC.

---

📚 References & Official Sources

1. Union Budget 2025 – Finance Bill Highlights, Government of India
   → https://www.indiabudget.gov.in

2. CBDT FAQ: New Tax Regime (Section 115BAC) – Standard Deduction ₹75,000
   → https://incometaxindia.gov.in

3. Section 24(b) – Interest on Home Loan for Let-out Property
   → https://www.incometaxindia.gov.in/Acts/Income-tax%20Act%2C%201961/102120000000006671.htm

---