As a new homebuyer, choosing the right tax regime is crucial for managing your finances effectively. With two options available – the old tax regime offering deductions on investments and the new tax regime with simplified tax slabs and a rebate – understanding which one works best for you can lead to significant savings.
The proposed Budget 2025 changes, including a tax rebate of Rs 60,000 on income up to Rs 12 lakh, make the new regime a more attractive choice for many. However, it’s important to weigh both options based on your specific needs and home loan situation.
Recent Budget 2025-26 Amendments
The recent Budget 2025-26 brought several important amendments aimed at simplifying taxes and enhancing benefits for taxpayers:
- New Tax Regime: The budget introduced a tax rebate of Rs 60,000 for incomes up to Rs 12 lakh (Rs 12.75 lakh for salaried individuals) under Section 87A, making the new tax regime more attractive.
- Income Tax Slabs: The new tax regime offers reduced and simplified income tax slabs, eliminating most deductions and exemptions available under the old regime.
- Standard Deduction: The new regime also includes a standard deduction for salaried individuals, further reducing taxable income.
- Tax Exemption for Home Buyers: There are new provisions for home buyers, including increased exemptions on home loan interest and principal repayment, encouraging people to invest in property.
- Focus on Middle-Class Relief: The government has introduced measures to reduce the tax burden on middle-income groups, enhancing their disposable income.
These changes aim to make the tax system simpler, with fewer deductions to manage, while also providing financial relief to taxpayers, especially middle-class families and new homebuyers.
Also Read: Home Loan Tax Benefits
Key Differences Between the Old and New Tax Regimes
The Old tax regime offers deductions and exemptions, allowing taxpayers to reduce taxable income through investments, while the New tax regime features lower tax rates but eliminates most deductions and exemptions for a simpler process. Choose based on your financial needs.
| Income | Deduction (₹) | HRA (₹) | Taxable Income (₹) | Tax under Old System (₹) | Tax under New System (₹) |
|---|---|---|---|---|---|
| 12.75 L | 5.75 L | 3.82 L | 3.18 L | 3,375 | Nil |
| 13 L | 5.75 L | 3.9 L | 3.35 L | 4,250 | 75,000 |
| 15 L | 5.75 L | 4.5 L | 4.75 L | 11,250 | 1.05 L |
| 20 L | 5.75 L | 7.1 L | 8.25 L | 72,500 | 1.75 L |
| 24 L | 5.75 L | 7.2 L | 11.05 L | 1.44 L | 3 L |
Deductions Allowed Under the Old Tax Regime
- Interest on Home Loan: ₹2,00,000
- Investment under Section 80C: ₹1,50,000
- Investment in NPS (Section 80CCD): ₹50,000
- Mediclaim (Section 80D, including parents): ₹50,000
- Leave Travel Allowance (LTA): ₹75,000
- Standard Deduction: ₹50,000
Total Deductions: ₹5,75,000
- New Tax Regime is Better for Incomes Up to Rs 12 Lakh: For people earning up to Rs 12 lakh (Rs 12.75 lakh for salaried individuals), the new tax regime offers better savings, even with maximum deductions and exemptions.
- Old Tax Regime Deductions: The old tax regime allows deductions up to Rs 5,75,000 and 30% of salary as House Rent Allowance (HRA), but these may not always lead to better savings for lower-income earners.
Also Read: Union Budget 2025 for Home Buyers
Factors to Consider When Choosing a Regime for a Home Buyer
When choosing a tax regime as a homebuyer, consider factors like home loan interest, principal repayment deductions, and overall income to determine which option offers the most savings.
Here are some key factors to consider when choosing a tax regime:
- Income Level: Your total income will influence which regime offers the most savings. The new regime benefits those with lower to moderate incomes.
- Deductions and Exemptions: If you plan to claim deductions (e.g., for home loans, insurance), the old regime may be more suitable.
- Taxable Income after Deductions: Evaluate if your taxable income reduces significantly after deductions in the old regime. If not, the new regime might be better.
- Home Loan or Rent: Consider how much you pay in home loan interest or rent, as these can be deducted under the old regime.
- Salaried vs. Self-employed: Salaried employees may benefit more from the new regime due to standard deductions, while self-employed individuals may prefer the old regime to claim business-related expenses.
- Simplicity: The new regime is simpler, with no need to track and claim deductions, making it easier to manage taxes.
How to choose a tax regime if your income is Rs 12.75 lakh, Rs 25.75 lakh, 55 lakh, 2.5 crore for a home buyer
To choose the best tax regime for incomes of Rs 12.75 lakh, Rs 25.75 lakh, Rs 55 lakh, or Rs 2.5 crore, compare the benefits of deductions in the old regime and lower tax rates in the new regime.
This will help you see which tax option works best for you in the upcoming year.
| Income | Old Tax Regime | New Tax Regime (Before Budget 2025) | New Tax Regime (Proposed Budget 2025) | Savings | Savings Percentage |
|---|---|---|---|---|---|
| Rs 12.75 Lakh | Rs 1,40,000 (with Section 80C investment) | Rs 83,200 | Rs 0 (100% tax savings) | Rs 83,200 | 100% |
| Rs 25.75 Lakh | Rs 4,75,800 (with Section 80C, medical insurance, home loan interest) | Rs 4,57,600 | Rs 3,43,200 | Rs 1,14,400 | 25% |
| Rs 55 Lakh | Rs 15,44,400 (with Section 80C, medical insurance, home loan interest) | Rs 15,32,960 | Rs 14,07,120 | Rs 1,25,840 | 8% |
| Rs 2.5 Crore | Rs 95,55,000 (with Section 80C, medical insurance, home loan interest) | Rs 95,42,000 | Rs 93,99,000 | Rs 1,43,000 | 1.5% |
Also Read: Tax Benefits on Second Home Purchase
Home Loan Benefits Under Each Regime
Under the old tax regime, homeowners can claim deductions for home loan interest (up to ₹2 lahks) and principal repayment (up to ₹1.5 lakh), while the new tax regime offers no such deductions for self-occupied properties but simplifies tax filing and provides higher standard deductions.
Old Tax Regime:
- You can claim a deduction on the interest paid on your home loan up to Rs 2 lakh per year for a self-occupied property (with full interest deduction available for let-out properties).
- Principal repayment qualifies for a deduction of up to Rs 1.5 lakh annually under Section 80C, which also covers stamp duty and registration charges.
- Joint home loans allow each co-borrower (who is also a co-owner) to claim separate deductions on both interest and principal repayments.
- Additional benefits may be available for first-time home buyers under sections like 80EE/80EEA if you meet specific eligibility criteria.
New Tax Regime:
- Most home loan deductions (both for interest and principal repayment) are not available for self-occupied properties, resulting in a simplified tax structure.
- You can still claim a deduction for the interest paid if the property is let out (rented), although no benefit is given for principal repayments.
- Proposed changes (as hinted in Budget 2025 discussions) may introduce an interest deduction for let-out properties up to Rs 2 lakh, but self-occupied properties remain excluded from such benefits.
Also Read: Negotiation Tips for Home Buyers
Conclusion
Choosing the right tax regime as a homebuyer depends on your tax-saving goals. The old regime is better if you want deductions on home loan interest and principal. The new regime offers lower tax rates and simplicity but fewer home loan benefits.
Frequently Asked Questions
The old tax regime is generally better for home loans, as it offers deductions on both home loan interest and principal repayment.
The choice between the old and new tax regime depends on your deductions; choose the old regime for maximizing deductions and the new one for a simpler, lower tax rate.
To calculate which tax regime is better for you, compare the total tax liability under both regimes, factoring in your deductions and exemptions in the old regime versus the lower tax rates in the new regime.
A home loan is eligible for tax benefits under Section 24(b) for interest and Section 80C for principal repayment, not under Section 80C or 80D.
Yes, you can claim both House Rent Allowance (HRA) and home loan deductions, as they are separate benefits under different sections of the Income Tax Act.
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