Union Budget 2025: Will Home Loan Borrowers Get the Much-Needed Tax Relief?

With a vision of 'Housing for All', the government introduced the Pradhan Mantri Awas Yojana (PMAY) in 2015, aiming to provide sustainable and affordable housing solutions to lower-income and middle-income groups, as well as economically weaker sections.

Building on this initiative, PMAY-U 2.0 was launched in 2024, with a target of addressing the housing needs of one crore urban poor and middle-class families over the next five years.

The scheme comes with central assistance of Rs 2.50 lakh crore, offering up to Rs 2.50 lakh per unit through various approaches, including Beneficiary Led Construction (BLC) and Interest Subsidy Scheme (ISS).

While the initiative is certainly commendable, its accessibility and effectiveness remain limited in the face of the escalating costs of buying or constructing homes, particularly in metro cities.

For instance, PMAY sets a maximum annual household income limit of Rs 18 lakh, excluding those who earn slightly above this threshold but may yet still struggle with affordability.

Additionally, beneficiaries must not own a permanent house anywhere in India or have previously benefited from any other government housing scheme.

These conditions disqualify individuals who may have inherited a small property that is inadequate for their needs, or have received minimal assistance in the past but still lack adequate housing.

Moreover, the definition of 'affordable housing' with reference to the price cap of Rs 45 lakh does not make sense.

In major urban centres, where people are migrating to make a living, a fact is escalating property prices can significantly diminish the affordability of housing, even with PMAY's interest subsidies.

For instance, in tier-I cities, the high cost of land and construction leads to housing prices that are beyond the reach of EWS (annual household income up to Rs 3 lakh) and LIG (annual household income up to Rs 6 lakh) segments.

While home loans have become the only viable route to homeownership, not enough deduction benefit is passed on to borrowers. Besides, with the New Tax Regime being made the default option in the last union budget, it is discouraging genuine home buyers who aren't getting any benefit from the home loan under the New Tax Regime.

Interest rates in India have also remained elevated ever since the Reserve Bank of India's (RBI's) series of repo rate hikes - cumulative 250 basis points between May 2022 and February 2023 and thereafter a status quo has been maintained. Higher interest rates are adding to the burden of genuine home buyers.

Home loan (and other loan) borrowers with floating-rate loans continue to face higher interest costs, increasing long-term financial strain.

A policy repo rate cut in the February 2025 or April 2025-26 upcoming bi-monthly policy meeting may provide some relief as banks eventually cut their home loan rates in response. However, much depends on the inflation trajectory and broader economic stability.

Home loan borrowers look for deductions available under certain sections of the Income Tax Act, 1961, for relief, but the current tax policies are not aligned with the realities of the real estate market.

Currently, Individuals earning non-business income have the flexibility to switch between the Old Tax Regime and the New Tax Regime each financial year (by filing Form 10IEA to transition from the New Tax Regime to the old one).

However, individuals with business or professional income do not have the same freedom. Once they opt out of the New Tax Regime, they get only a single opportunity to return to it. After making the switch back to the new regime, they cannot revert to the old regime anytime in the future.

Given that the new regime is the default option and that the government is keen on attracting as many individual assessees as possible to this regime, effective benefits also need to be passed on to home loan borrowers which aligns well with the government's mission of 'Housing for All'.

Currently, the New Tax Regime leave assessees bereft of many critical deductions on home loans that are available under the Old Tax Regime, including Sections 24(b), 80C, and 80EEA.

Even under the Old Tax Regime, where you can avail of these deductions, the government has not bothered to raise the limits to reflect the rising costs of property.

There is no incentive for home loan borrowers already enduring the brunt of high-interest costs to shift to the New Tax Regime.

Expectations from the Union Budget 2025-2026

In the upcoming Union Budget 2025, Finance Minister, Ms Sitharaman should seriously consider increasing the current deduction limit of Rs 2 lakh under Section 24(b) for interest paid on home loans for a Self-Occupied Property (SOP) to Rs 4 or 5 lakh.

In addition, given the objective of 'Housing for All' the Section 80EEA deduction limit of Rs 1.50 lakh allowed on the interest paid on home loans for 'affordable housing' (defined as property value not exceeding Rs 45 lakh and the area not exceeding 60 sq. meter in the case of metropolitan cities and 90 sq. meter in case of any other cities or towns) should be passed on to individuals opting for the New Tax Regime by expanding the present scope of definition of 'affordable housing', particularly the cost to around Rs 65 lakh (from the present Rs 45 lakh) and the area of around 90 square meters for metropolitan-city carpet (from the current 60 square meters).

Given the rising costs of property, particularly in urban areas, this isn't an unwarranted ask.

Also, the deduction limit under Section 80C of up to Rs 1.50 lakh per financial year, for the principal repayment of your home loan (and other tax-saving investment made) hasn't been increased in the last 10 years.

Given the increase in property prices, especially in urban areas, and if other tax-saving investments are made, often the limit of Rs 1.50 lakh outstrips in a financial year.

Ms Sitharaman should consider either increasing the overall Section 80C limit or introducing a separate section specifically for home loan principal repayments, with a higher deduction cap of up to Rs 3 lakh.

Most importantly, the above deductions (with increased limits) should be made a part of the New Tax Regime to encourage more taxpayers to opt for it.

Given the simplicity of filing taxes and lower tax rates under the New Tax Regime, winning over more taxpayers to it is the need of the hour.

[Read: Union Budget 2025-26: How Can the New Tax Regime Attract More Taxpayers]

To Conclude...

Finance Minister, Ms Nirmala Sitharaman is set to present the Union Budget 2025 on February 1, 2025.

We hope that she, and the Modi 3.0 coalition government, pay heed to the longstanding expectations of home loan borrowers.

Further, allowing these deductions (along with HRA deductions as well as health insurance premium deductions) can entice more taxpayers, particularly salaried individuals, to opt for the default New Tax Regime.

Taxpayers should thoughtfully choose between the Old Tax Regime and the New Tax Regime.

We are on Telegram! Join thousands of like-minded investors and our editors right now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.