Home loan interest deduction: the ₹2 lakh cap in rupees

What the deduction is

If you live in the house you bought with a home loan, Section 24(b) of the Income-tax Act 1961 lets you deduct the interest you pay on it, up to ₹2,00,000 a year. The Income-tax Act 2025 renumbered the deduction sections from 1 April 2026, so check the section named on the return form you file; the idea is the same.

Three conditions matter:

• Old regime only. On the default new regime, a self-occupied home earns no interest deduction at all.
• The ₹2 lakh needs the home to be finished in time. The loan must have been taken for buying or building, and construction must be complete within five years from the end of the financial year in which the loan was taken. Miss that and the limit on interest falls to ₹30,000.
• Principal is a separate basket. The principal you repay, plus stamp duty and registration charges in the year of purchase, can go into the ₹1.5 lakh Section 80C limit, also old regime only. See Section 80C options compared for how crowded that basket usually is.

The extra deduction under Section 80EEA, which gave first-time buyers another ₹1.5 lakh, applied only to loans sanctioned up to 31 March 2022, so a loan taken today does not qualify.

The deduction in rupees

A deduction does not return its full amount. It removes that amount from taxable income, so the saving is the deduction times your marginal tax rate, plus 4% cess on the tax. The table ignores surcharge.

So the headline "₹2 lakh deduction" is worth ₹62,400 a year at best, and ₹41,600 for someone in the 20% slab. Over a 20-year loan with interest above ₹2 lakh every year, the best case is roughly ₹12.5 lakh of tax saved (₹62,400 × 20 = ₹12,48,000). That is real, but it is not the same as "interest-free".

Interest above the cap is not deducted

Suppose your interest for the year is ₹3,20,000. Only ₹2,00,000 counts; the other ₹1,20,000 earns nothing. At the 30% slab the saving is ₹62,400, the same as if your interest had been exactly ₹2 lakh. Borrowers with a large early-years interest bill therefore see the deduction worth a smaller share of what they pay. In a loan this size, the deduction offsets about 19.5% of the interest paid (₹62,400 ÷ ₹3,20,000).

Two co-owners can claim more

If the same ₹3,20,000 of interest is paid by two co-owners and co-borrowers who repay equally, each pays ₹1,60,000 and each claims ₹1,60,000, which is within the limit.

The couple saves ₹37,440 a year more than the single owner, only because the interest is spread across two people's caps. The conditions are that both names are on the title and the loan, and that each person actually repays their share from their own income; a name added only for the deduction is the kind of thing that fails on scrutiny.

Interest paid before you move in

Interest during construction is not lost, but it is not claimed immediately. The total pre-possession interest is claimed in five equal instalments, starting in the year you get possession. If you paid ₹4,00,000 of such interest, you claim ₹80,000 a year for five years. That is added to the interest for the current year, and the sum is still limited to ₹2 lakh. With ₹1,50,000 of current-year interest, the total is ₹2,30,000 and ₹2,00,000 counts.

A let-out house works differently

For a house you rent out, the interest is deductible against the rent without the ₹2 lakh cap, but a resulting loss can be set off against your other income only up to ₹2 lakh a year in the old regime. The rest carries forward. The rental income itself is taxable, which is covered in rental yield: what a flat earns after costs and tax.

Does the deduction change the home loan decision?

It lowers the effective cost of the interest, but it also assumes you are on the old regime. Many salaried people are better off under the new regime's lower slabs, with no deductions at all. The honest test is to run both with your own numbers in the old vs new tax regime calculator, and compare against the rent you would otherwise pay in rent vs buy.

Reading this

• Rates here are marginal rates with 4% cess. Surcharge, and the rebate for lower incomes, are not modelled.
• Rules are described as they stand for FY 2026-27. Tax law changes every Budget, so confirm against the current Act or with a chartered accountant before filing.
• This is a description of how the deduction is calculated, not tax or investment advice.