Free Tool · FY 2025-26 · AY 2026-27
Home Loan vs Bank Overdraft — which is really cheaper?
A home loan front-loads its interest and caps your deduction at ₹2 lakh. A business overdraft deducts in full and, if you repay it religiously, can cost less. This tool pits the two against each other net of tax — modelling Sections 24(b), 36(1)(iii), 71(3A) and the new regime — and shows the race to zero. All calculations run in your browser.
Reviewed by Harun Raaj, CA — ICAI Membership No. 238303 · Firm Reg. 19027S · Updated July 2026
The two financing routes
Home Loan
Bank Overdraft
Before you rely on the OD deduction
Overdraft interest is deductible only if the borrowed funds are actually deployed for a qualifying purpose — a business or profession (s.36(1)(iii)) or to earn taxable income (s.57(iii)). Interest on an OD used to buy or hold a personal self-occupied home is not freely deductible; it falls back under s.24(b) with the same ₹2,00,000 cap. The classic, defensible structure is the reverse: fund the business through the OD (full deduction) and keep the housing loan for the house. Have a CA document the fund trail — deductibility is decided on use of funds, not on what the account is called.
Bank Overdraft is cheaper by ₹29,87,937 over 20 years, net of tax
Faster principal paydown (12% swept yearly) plus uncapped s.36(1)(iii) interest relief beats the front-loaded home-loan interest.
Home Loan
Bank Overdraft
CheaperThe race to zero
Outstanding balance over the 20-year horizon. The shaded area is money on which you pay interest — the smaller it is, the less interest leaves your pocket.
Structuring a home purchase around a business OD?
Get the fund trail and section positions documented so the deduction survives scrutiny. We’ll model it on your actual numbers.
Disclaimer: This tool is for general guidance only and does not constitute tax or legal advice. Results depend on the inputs you provide and assumptions about repayment behaviour. Tax deductibility of interest turns on the actual use of borrowed funds and your individual tax position — a CA must verify the fund trail before you rely on any section position. Interest figures are illustrative; actual bank terms may differ. Harun Raaj & Associates, Chartered Accountants.
Statutory Basis
Every tax position in this tool maps to a specific provision. The overdraft deduction in particular turns on the use of funds — verify each against the legislation, and have a CA confirm your facts before relying on it.
Home-loan interest — self-occupied
Section 24(b) of the Income Tax Act, 1961 — interest on a self-occupied property capped at ₹2,00,000 per year. Not available under the new regime (Section 115BAC).
Home-loan interest — let-out
Section 24(b) — interest fully deductible against rental income (after the 30% standard deduction under Section 24(a)); no cap on the deduction itself.
Set-off of house-property loss
Section 71(3A) — house-property loss set off against other heads limited to ₹2,00,000 per year; excess carried forward up to eight years under Section 71B. Inter-head set-off disallowed under the new regime.
Overdraft interest — business use
Section 36(1)(iii) — interest on capital borrowed for the purposes of business or profession is fully deductible, with no cap, in both regimes.
Overdraft interest — to earn income
Section 57(iii) — interest on money borrowed to earn income taxable under "Income from Other Sources" is deductible against that income.
New regime
Section 115BAC as amended by the Finance Act 2025 — disallows self-occupied Section 24(b) interest and inter-head set-off of house-property loss.
Frequently Asked Questions
Is overdraft interest tax-deductible like home loan interest?+
Only when the borrowed funds are put to a qualifying use. Interest on an overdraft deployed in a business or profession is fully deductible with no cap under Section 36(1)(iii); interest on borrowings used to earn taxable income is deductible under Section 57(iii). An overdraft used to buy or hold a personal self-occupied home is not freely deductible — it falls under Section 24(b) with the same ₹2,00,000 cap. Deductibility is decided on the actual use of funds, not the name of the account.
What is the ₹2 lakh limit on home loan interest?+
For a self-occupied house, interest deductible under Section 24(b) is capped at ₹2,00,000 per year. Even for a let-out property (where the interest deduction itself is uncapped), the net loss from house property that can be set off against other heads of income is limited to ₹2,00,000 a year under Section 71(3A); the balance is carried forward for up to eight years. Source: Sections 24(b) and 71(3A), Income Tax Act.
Does the new tax regime allow a home loan interest deduction?+
For a self-occupied property, no — Section 115BAC disallows the Section 24(b) interest deduction under the new regime, so a self-occupied home loan gives zero tax benefit there. For a let-out property, interest is still allowed against the rental income, but the resulting house-property loss cannot be set off against salary or business income under the new regime. A business overdraft under Section 36(1)(iii), by contrast, remains fully deductible in both regimes.
Is a bank overdraft actually cheaper than a home loan?+
It can be, but only with repayment discipline. A home loan is front-loaded — most of the early EMIs are interest. An overdraft charges interest only on the outstanding balance, so if you sweep surplus in and pull the balance down faster than a home loan would amortise, you pay less total interest — even though OD rates usually run 0.5–1% higher. If the balance is left drawn, the overdraft is more expensive. The tool lets you set the surplus swept each year to see the crossover.
Can I use a business overdraft to buy a house and claim the full interest?+
No. If the OD funds are used to acquire a personal self-occupied home, the interest is governed by Section 24(b) and capped at ₹2,00,000 — the business deduction under Section 36(1)(iii) is not available because the funds were not used for the business. The defensible structure is the reverse: fund the business through the overdraft (full deduction) and keep a housing loan for the house. Always have a CA document the fund trail, since deductibility turns on the use of the borrowed money.
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Financing a home around your business?
The tax saving is real only if the fund trail and section positions hold up. We structure the borrowing, document the use of funds, and model it on your actual numbers.