House-property losses are one of the easiest places to make a wrong tax-regime assumption. The interest deduction may exist, but the ability to use the resulting loss against salary, business income or other heads can differ sharply between the old and new tax regimes. For AY 2026-27, the Income Tax Department’s guidance makes this distinction especially important for salaried taxpayers with home loans.
Start with the property type
The first question is whether the property is self-occupied or let out. For a self-occupied house under the old regime, interest on borrowed capital under section 24(b) can generally be deductible up to ₹2 lakh where the qualifying conditions for acquisition or construction are met. In specified older-loan or repair situations, the limit can be ₹30,000. The Income Tax Department summarises these limits in its AY 2026-27 guidance for salaried individuals.
For a let-out property, the same official guidance shows interest on borrowed capital as deductible at actual value without a property-level monetary ceiling. But that does not mean the entire resulting loss can always be adjusted against salary or other income in the same year.
Old regime: how house-property loss is used
Under the old regime, a loss under the head “Income from House Property” can be set off against income under other heads during the year, subject to the ₹2 lakh inter-head set-off ceiling. Any eligible unabsorbed house-property loss can then be carried forward for up to eight assessment years and set off against house-property income, subject to the applicable rules.
This distinction matters because the interest deduction and the loss set-off are separate steps. A let-out property may generate a larger negative figure after deductions, but only the permitted amount can reduce income under other heads in the current year.
New regime: the treatment is more restrictive
Under the new tax regime for AY 2026-27, the Income Tax Department states that interest on borrowed capital for a let-out property may be considered at actual value, but a resulting house-property loss cannot be set off against other heads in Schedule CYLA and cannot be carried forward to future years. The Department states this treatment in its salaried-individual guidance and similarly in its business/profession guidance.
For self-occupied property, taxpayers should not assume that the old-regime section 24(b) home-loan benefit automatically survives unchanged under the new regime. Regime selection should therefore be tested using the actual property facts, deductions and total income rather than only comparing slab rates.
Worked example: let-out property under the old regime
Assume a taxpayer has salary income of ₹12 lakh and, after computing annual value and allowable deductions, a let-out property produces a house-property loss of ₹3 lakh. Under the old-regime framework, up to ₹2 lakh of the house-property loss may be set off against income under other heads in the same assessment year. The remaining eligible loss may be carried forward and used against future house-property income within the permitted carry-forward period.
The example illustrates why “actual interest is deductible” and “the full loss reduces salary” are not the same statement. The head-wise computation comes first; set-off rules are applied after that.
What happens to old house-property losses after the new Income-tax Act transition?
The Income Tax Department has separately clarified that brought-forward house-property losses from periods before 1 April 2026 do not simply disappear because the Income-tax Act, 2025 has commenced. Its set-off and carry-forward FAQ explains that eligible losses brought forward from earlier years continue under the repeal-and-savings framework, subject to the original conditions and remaining carry-forward period.
Do not confuse ITR eligibility with deduction eligibility
The return form is a reporting vehicle; it does not create the deduction. For AY 2026-27, the Department’s ITR-1 FAQ states that income from up to two house properties can be disclosed in ITR-1 where the taxpayer otherwise satisfies that form’s conditions. ITR-2 can also cover house-property income and is relevant where ITR-1 conditions are not met.
A taxpayer should therefore determine the substantive tax treatment first and then choose the correct return form based on the complete income profile.
Practical checklist before claiming home-loan interest or house-property loss
- Classify each property correctly: identify whether it is self-occupied, let out, or treated as let out under the applicable rules.
- Identify the tax regime: do not copy the old-regime interest and set-off treatment into a new-regime computation.
- Separate deduction from set-off: compute income from house property first, then apply the rules governing adjustment of any loss.
- Track brought-forward losses: maintain year-wise records of the originating assessment year, amount used and balance remaining.
- Keep loan details ready: AY 2026-27 return guidance asks for details such as lender, loan account number, sanction date, total loan, year-end outstanding balance and interest on borrowed capital.
- Choose the return form only after the computation: check the complete ITR-1, ITR-2 or other applicable-form eligibility conditions.
Common mistakes to avoid
- Claiming that all home-loan interest automatically reduces salary income.
- Treating the ₹2 lakh old-regime inter-head set-off ceiling as a ceiling on the property-level interest deduction for every let-out property.
- Carrying forward a new-regime house-property loss without checking whether carry-forward is permitted.
- Ignoring old brought-forward losses during the transition to the Income-tax Act, 2025.
- Selecting ITR-1 merely because the taxpayer has salary and a house, without checking the form’s other exclusions.
Practical takeaway
For house-property tax planning, calculate in the right order: classify the property, apply the correct section 24 treatment, compute the income or loss under the house-property head, and only then apply the regime-specific set-off and carry-forward rules. The old regime can permit current-year inter-head set-off of house-property loss up to ₹2 lakh and eligible carry-forward, while the new regime is materially more restrictive. The final choice should be based on the taxpayer’s complete income and deduction profile, not on the home-loan interest figure alone.
