Will Budget 2026 Allow Higher Home Loan Interest Deductions?

Context Ahead of Budget 2026

As the Union Budget 2026 approaches, taxation related to housing finance has emerged as a key topic of discussion among policymakers, industry bodies, and financial experts. One of the central proposals under consideration involves revisiting the current tax treatment of home loan interest, which many stakeholders believe no longer reflects present-day property prices and borrowing realities.

At present, taxpayers can claim a deduction of up to ₹2 lakh per year on interest paid on home loans for self-occupied properties. With rising home values and higher loan sizes, this threshold is increasingly viewed as restrictive.

Proposal to Increase Interest Deduction Limit

Several experts have suggested increasing the home loan interest deduction limit from ₹2 lakh to ₹5 lakh. The rationale behind this proposal is linked to affordability challenges faced by middle-income households, particularly in urban centres where housing costs have risen faster than incomes.

An enhanced deduction limit could reduce the effective cost of borrowing, making home ownership more attainable for a broader segment of buyers. While no official confirmation has been made, the proposal reflects ongoing efforts to align tax benefits with current market conditions.

Why the Existing Limit Is Under Review

In many cities, even modestly priced homes require loan amounts that result in annual interest outgo well above the current deduction cap. This gap reduces the practical benefit of tax relief and limits its impact on buyer decisions.

Supporters of a higher cap argue that revised limits could strengthen housing affordability, support first-time buyers, and encourage formal borrowing rather than alternative financing arrangements.

Set-Off of Losses From House Property

Another area under discussion is the treatment of losses arising from house property. Currently, losses from house property that can be set off against other income are capped at ₹2 lakh per year, with the remaining amount carried forward.

Some experts propose revisiting or relaxing this cap, particularly for investors with multiple properties or higher interest outgo. They argue that the existing restriction can discourage real estate investment and limit flexibility in financial planning.

Potential Impact on the Housing Market

If implemented, higher interest deductions and revised loss set-off norms could influence housing demand by improving post-tax affordability. Increased buyer participation may support sales velocity, reduce inventory overhang, and strengthen confidence across residential markets.

From a broader perspective, increased housing activity has linkages with construction, building materials, financial services, and employment, contributing to economic activity beyond the real estate sector.

Fiscal Considerations and Policy Balance

Any changes to tax deductions must also be evaluated in the context of fiscal discipline. Policymakers are required to balance revenue considerations with growth-oriented incentives. As a result, proposals related to tax relief are typically assessed alongside broader budgetary priorities.

This makes it uncertain whether all suggested reforms will be adopted in full, partially, or deferred for future consideration.

What Stakeholders Are Watching

Homebuyers, developers, lenders, and investors are closely tracking announcements leading up to Budget Day. Clarity on housing-related tax provisions is expected to influence purchasing decisions and investment planning in the coming financial year.

Until official announcements are made, the proposals remain part of ongoing discussions rather than confirmed policy outcomes.

Looking Ahead

As Budget 2026 draws closer, expectations around housing-related tax reforms highlight the importance of aligning fiscal policy with evolving market realities. Whether through higher deductions, revised loss treatment, or targeted incentives, any changes introduced could reshape homeownership economics in the years ahead.

For taxpayers, staying informed and planning cautiously will remain essential as the final contours of the budget become clear.

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