More disposable income, bigger EMIs? Will higher tax cut pump up home loans?

The tax cuts introduced in Budget 2025 under the new tax regime are expected to significantly influence home loans by increasing affordability and driving demand. With reduced income tax rates, individuals now have higher disposable income, enabling them to take on larger Equated Monthly Installments (EMIs). Banks calculate loan eligibility based on disposable income, so with more post-tax earnings, borrowers can qualify for higher loan amounts. This makes it easier for potential buyers to afford bigger or pay their dues faster.

For instance, an individual earning more than ₹12 lakh annually and paying ₹2 lakh annually in home loan interest would have seen higher tax liabilities under the old regime, leaving them with less disposable income. Now, with the tax cuts and deductions, they save on more taxes under new regime and can either take on higher EMIs for a bigger home or redirect savings toward paying off their loan faster.

CA (Dr.) Suresh Surana, said, "The inclusion deduction of home loan interest on Let out property deductions under the new tax regime directly reduces the cost of borrowing. For example, if a borrower pays ₹2 lakh annually as home loan interest, this amount can be deducted from taxable income, lowering their tax liability. Over the loan tenure, these savings can add up, making homeownership more affordable and manageable."

Additionally, the Budget 2025 proposed to simplify tax rules so that a self-occupied house’s value would be taken to be nil if the owner lives in it or can’t due to any reason (currently the reasons are being restricted to employment, business, or profession at another location), but the two-property limit stays. Such change provides more flexibility and may benefit homeowners who, for reasons like travel or medical conditions, are unable to reside in their property but would still like to claim the nil annual value.

Adhil Shetty, CEO of BankBazaar.com said, "Property prices are not expected to soften, especially with the ongoing premiumisation. In fact, with the tax bracket adjustments and enhanced tax savings, buyers will look to premiumise even more. The tax bracket adjustments alone can unlock monthly tax savings of ₹9,500 to ₹10,400 on incomes above ₹24 lakh. In terms of EMI affordability, these savings can help buyers borrow ₹11-12 lakh more on a 20-year loan, or ₹12-14 lakh more on a 30-year loan at the current interest rates. As and when rate cuts happen, borrowers may be able to expand their loan eligibility further."

Moreover, the Reserve Bank of India’s recent decision to lower the Cash Reserve Ratio has increased liquidity in the banking system, paving the way for lower lending rates.

"With expectations of further rate cuts, home loans could become cheaper, reducing the financial burden on borrowers. Lower interest rates not only make it more affordable to take new loans but also provide relief to existing borrowers through reduced EMIs," says Amit Jain, CMD at Arkade Developers Limited.

However, one must also understand that simply tax cuts don't necessarily make a home more affordable. While they increase disposable income, other factors like property prices, interest rates, and loan tenure play a significant role in determining affordability.

While, these fiscal measures, combined with monetary policy support, can make homeownership more accessible. The benefits may encourage borrowers to take advantage of lower costs. But, one should still assess their financial capacity carefully to avoid overextending themselves.