Budget 2026: Allow ₹5 lakh home loan interest deduction or remove loss set-off limit, experts say

Budget 2026 home loan deduction expectations: Under the new tax regime, home loan borrowers cannot claim a deduction against the interest paid to lenders. In the old tax regime, a deduction of only up to ₹2 lakh is allowed. As the housing prices and monthly home loan interest outgo of borrowers increase, experts and industry bodies have urged the government to provide the following relief to borrowers through Budget 2026:

• First, provide for home loan interest deduction under the new tax regime

• Second, increase the deduction amount to up to ₹5 lakh (under both regimes) or remove the restriction on set-off of losses from house property

This article explains the reasons provided by various industry bodies for the above two expectations.

Deduction limit hike or higher set-off of loss

Further, in case of self-occupied property, carry forward of unabsorbed interest is not allowed.

"In view of rising prices of properties limit of ₹2,00,000 is inadequate amount. It is suggested to revise the amount of ₹2,00,000 and also allow the carry forward of unabsorbed interest in case of self-occupied property," experts at the Federation of Indian Petroleum Industry (FIPI) said in their pre-budget memorandum 2026.

The American Chambers of Commerce in India (AMCHAM) has suggested allowing set off of house property loss against any other head of income or, alternatively, increase the deduction limit from ₹2 lakh to ₹5 lakh.

"It is recommended to allow the house property loss to be set off against any other head of income in the same year without any limit in case of rented property as it was earlier. Alternatively, the limit of ₹2 lakhs may be raised to at least ₹5 lakhs," AMCHAM said in their pre-budget memorandum.

Currently, Section 71 of the Income Tax Act 1961 allows set off of any loss arising under the head “Income from House Property” against any other head of income. However, it is restricted to set off the losses to the extent of ₹2,00,000 against any other head of income.

"Middle-class people generally invest in property by obtaining loan from the banks. The initial amount of interest paid is always higher than the rental income earned against such property," AMCHAM said.

The Bombay Chambers of Commerce and Industry (BCCI) have also urged the government to either increase the deduction limit to ₹5 lakh or remove the restriction on set-off of house property loss.

"It is recommended that the restrictive amendment be relooked and suitably amended so that earlier law could be restored. Alternatively, the limit for setoff of loss on account of interest should be increased to ₹5,00,000," BCCI said in its pre-budget memorandum.

The Finance Act 2017 had restricted the set-off and carry forward of losses from house property by capping the maximum setoff permissible to ₹2,00,000 in the year it accrues.

"It is also recommended that there be no restriction in setting off the house property losses and hence, the earlier law should be restored. Further, any carried forward house property loss should be allowed to be set off against any other head of income in future years," BCCI said.

Home loan deduction in New Tax Regime

Tax experts at KPMG have suggested allowing housing loan interest deduction in new tax regime under Section 202 of Income-tax Act, 2025, (corresponding to Section 115BAC of the Income-tax Act, 1961).

"Under the new tax regime, taxpayers cannot offset housing loan interest against salary income, including for self-occupied property. Considering the significant burden of home loan repayments and the goal of promoting home ownership, it is recommended that the Government allows such interest deduction on self-occupied property under the new tax regime," they said.