Homeowners Can Claim Dual Tax Deductions on Original and Refinanced Home Loans

The Central Board of Direct Taxes (CBDT) circular number 28 (dated August 20, 1969), allows people to claim a tax deduction under the old tax regime if they take out a fresh loan to repay their home loan.

For example: if you have taken a home loan for 15 years at 7.5% interest rate (assuming) and your brother is giving you a loan at 1% interest rate for say a 8-year term, then you can use the brother's loan amount to repay a higher portion of the home loan and still claim a tax deduction for the interest of both the loans, up to Rs 2 lakh under the old tax regime.

What does the Income Tax Act 2025 say?

Chartered Accountant Suresh Surana said to ET Wealth Online that the clarification made by the CBDT in the previous circular is likely to remain valid in 2026 under the Income-tax Act, 2025, as long as it aligns with the new law.

According to Surana, Section 536 of the Income-tax Act, 2025 (Repeal and Savings) specifically provides that, notwithstanding the repeal of the Income-tax Act, 1961, all circulars, instructions, and directions issued under the erstwhile law shall continue to remain in force, to the extent they are not inconsistent with the provisions of the new Act.

Surana says: "Accordingly, the CBDT's clarification that interest on a fresh loan taken to repay an original loan (which was itself eligible for deduction) would also qualify for deduction should continue to be applicable."

How much tax deduction under the old tax regime can you claim for the two loans?

Surana says the eligibility for tax deduction depends on the purpose for which the loan is taken, not the rate of interest.

For self-occupied house properties, you can claim a maximum of Rs 2 lakh as tax deduction for home loan interest. This overall limit of deduction remains Rs 2 lakh for self-occupied property and thus the source or restructuring of the loan does not enhance this limit.

Surana "Even if multiple loans are involved (original and refinanced), the aggregate interest deduction cannot exceed the prescribed threshold."

Does the second loan have to be a home loan in order to be eligible for this benefit?

According to Surana, the classification or label of the loan is not decisive for the purpose of claiming deduction under Section 22 of the Income-tax Act, 2025 [corresponding to section 24(b) of the Income-tax Act, 1961(], what matters is the purpose for which the loan is used.

So, if you take out another loan, whether it's called a housing loan, personal loan, or loan against property, and you use it to pay off your original housing loan, the interest on the second loan may qualify for deduction.

Surana says: "It is, however, essential to maintain proper documentation to establish a clear link between the subsequent loan and the repayment of the original housing loan."

Can a homeowner take a loan from a friend at a lower interest rate and then repay the existing home loan which has a higher interest rate?

According to Surana, a taxpayer may claim that a loan taken from a friend was used to repay the original housing loan, provided this can be clearly substantiated. However, such arrangements may be subject to scrutiny. It is important to maintain proper documentation, including the loan agreement, evidence of fund flow, and records of repayment.

Surana says: "Arrangements that do not demonstrate a genuine commercial basis could be questioned by the tax authorities."

In the ITR, does the homebuyer need to do anything to claim this tax deduction benefit according to this circular?

According to Surana, there is no separate reporting requirement specific to such refinancing transactions. The taxpayer simply needs to report the total eligible interest under the "Income from House Property" head.

Surana says: "However, supporting documents such as loan statements, repayment schedules, and proof of fund utilisation should be retained and furnished if called for during assessment."

What did CBDT say in the circular number 28 of 1969

The circular says:

Section 24(1)(vi ) provides that where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital shall be allowed as an admissible deduction in the computation of income from the said property.

A question has been raised whether in a case where a fresh loan has been raised to repay the original loan taken for the above purpose, the interest payable in respect of the second loan would also be admissible as a deduction under section 24(1)(vi).

The matter has been considered by the Board and it has been decided that if the second borrowing has really been used merely to repay the original loan and this fact is proved to the satisfaction of the Income-tax Officer, the interest paid on the second loan would also be allowed as a deduction under section 24(1)(vi).