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8. What is the maximum amount of tax deduction under Home Loan Interest?

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Under Section 26E(2) and Schedule 3D of the Inland Revenue Ordinance, if a person is the sole owner of a dwelling, the amount deductible is the home loan interest actually paid by him/her in the year of assessment subject to a maximum deduction of $100,000 per year (as from the year of assessment 2003/04) . Deduction of home loan interest is allowable to each taxpayer for 7 years of assessment (whether continuous or not). Note: A maximum deduction of $100,000 each year for the years of assessment 1998/99 to 2000/01, and $150,000 for 2001/02 and 2002/03.

Remember that only the interest, but not the principal, of the relevant loan can be claimed for deduction.

Note: As from the year of assessment 2005/06, the allowable deduction period has been extended to 10 years. For details, please click here .

If a person is the joint tenant or the tenant in common of a dwelling, the home loan interest is regarded as having been paid by the joint tenants each in proportion to the number of joint tenants, or by the tenants in common each in proportion to his or her share of ownership in the dwelling. The amount of allowable deduction for each person is calculated accordingly, and the maximum deduction is also similarly reduced.

Example 1 - A dwelling owned by joint tenants

Mr. A and Mr. B are joint owners of a dwelling which they used exclusively as their place of residence throughout 2004/05. The dwelling was acquired 4 years ago with a mortgage loan, borrowed by them jointly from a bank, repayable by monthly installments over a 10-year period. During 2004/05, the total interest paid amounts to $180,000. Both Mr. A and Mr. B claim a deduction for home loan interest in 2004/05.

Result
The share of interest paid by Mr. A and Mr. B in 2004/05 is $90,000 each. A deduction limited to $50,000 is allowed to Mr. A and Mr. B each, which is the maximum allowable deduction in proportion to the number of the joint tenants (sections 26E(2)(b)(i) and 26E(2)(c)(i) of IRO). Remember that the total available deduction in respect of the property is $100,000.

Example 2 – A dwelling owned by tenants in common

Same facts as in Example 1 except for that Mr. A and Mr. B are tenants in common with the proportion of shares being 1/4 and 3/4 respectively.

Result
The share of interest paid by Mr. A and Mr. B in 2004/05 is $45,000 and $135,000 respectively. A deduction of $25,000 and $75,000 is allowed to Mr. A and Mr. B respectively, which is the maximum allowable deduction in proportion to their respective share of ownership in the dwelling (sections 26E(2)(b)(ii) and 26E(2)(c)(ii) of IRO).

Is the "penalty interest" paid to a bank for the early redemption of a mortgage on the dwelling deductible?

Not deductible. This is a penalty levied by the bank. It is not loan interest.

What are the requirements for the grant of deduction?

According to Section 26E of the Inland Revenue Ordinance , all the following conditions must be satisfied before the deduction is granted:

i. the person (taxpayer) claiming the deduction is the owner of the dwelling (either as a sole owner, a joint tenant or a tenant in common);

ii. the dwelling is a separate rateable unit under the Rating Ordinance (i.e. it is situated in Hong Kong );

iii. the dwelling is wholly or partly used by the person as his place of residence in the year of assessment;

iv. home loan interest is paid by the person during the year of assessment on a loan for the acquisition of the dwelling;

v. the loan is secured by a mortgage or charge over the dwelling or over any other property in Hong Kong; and

vi. the lender is an organization prescribed under Section 26E(9) of the Inland Revenue Ordinance , i.e.

    • the Government,
    • a financial institution,
    • a registered credit union,
    • a licensed money lender,
    • the Hong Kong Housing Society,
    • the person's employer, or
    • any organization or association approved by the Commissioner of Inland Revenue.

If the property is not used as the owner's dwelling but is let out with rental income, please refer to Personal Assessment for how to claim a deduction on loan interest.