Budget 2026: Calls Grow to Raise Home Loan Interest Deduction to ₹5 Lakh or Ease Loss Set-Off Rules

As India prepares for the Union Budget on 1 February 2026, homebuyers and tax experts have made strong representations to the government seeking changes in housing-related tax provisions. At the centre of these demands is the issue of home loan interest deductions and loss set-off limits — long considered a key relief for middle-income taxpayers. With property prices and interest costs rising over the past decade, industry bodies feel the existing rules no longer match economic realities. 

Why Experts Want Higher Home Loan Interest Deduction

Under the current framework, home loan interest deduction for a self-occupied property is capped at ₹2 lakh per year under Section 24(b) of the Income-tax Act, a limit last revised in Budget 2014. This applies only in the old tax regime; the new tax regime allows no such deduction.  

Tax professionals argue this cap has become inadequate. With prices of residential property and borrowing costs up sharply, the interest component of EMIs often exceeds ₹2 lakh for many borrowers, especially in urban areas. Without adequate tax relief, the effective cost of housing increases for taxpayers who are already balancing high living costs.  

Experts from bodies such as AMCHAM and the Bombay Chambers of Commerce and Industry have urged the government to either raise the ₹2 lakh limit to ₹5 lakh or remove the cap on set-off of interest altogether. Such a revision, they argue, would reduce the tax burden and encourage housing investment, particularly for first-time buyers and those in the middle-income bracket.  

Read More - How Sections 80C and 24(b) Help Indian Borrowers

Loss Set-Off Rules: What Needs Change?

Another point of concern is the set-off and carry-forward rules for losses arising under “Income from House Property”. Presently, losses from house property can be set off against other heads of income only up to ₹2 lakh in a financial year, with any excess restricted to future adjustments only against house property income.  

This restriction was introduced in Finance Act 2017. Industry voices now propose restoring the earlier, more flexible provisions. Under those, losses from house property could be set off fully against any other income head without the ₹2-lakh ceiling, providing relief especially when rental income is low or absent.  

The Federation of Indian Petroleum Industry (FIPI) has argued that the ₹2 lakh cap is inadequate given rising property prices and has suggested revising the limit upwards, along with allowing carry-forward of unabsorbed interest for self-occupied properties.  

Inclusion in the New Tax Regime

The current “simplified” new tax regime — introduced in 2020 and refined in subsequent years — does not allow home loan interest deductions for self-occupied property even where taxpayers might prefer lower base rates. Critics argue this creates an imbalance: individuals who choose the new regime for lower rates end up losing out on housing-related deductions entirely.  

Tax experts at KPMG have recommended allowing housing loan interest deduction for self-occupied property under the new tax regime. They argue that this would ease the repayment burden and support the policy goal of promoting home ownership without discouraging adoption of the simplified regime.  

Also Read - Section 24(b) Deduction Still Available In 2026

What These Changes Would Mean for Homebuyers

If the government raises the deduction to