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

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

Under Section 26E(2)  of the Inland Revenue Ordinance, if you are the registered sole owner of a dwelling, you can get deductions of Home Loan Interest paid on the mortgage of your home. The maximum amount of deduction for each year is $100,000 from the year of assessment 2017/18 onwards.

With effect from the year of assessment 2012/13, the number of years of deduction for home loan interest is extended from 10 to 15 (not necessarily consecutive) years of assessment, while maintaining the current deduction ceiling of $100,000 a year.  The additional 5 years home loan interest deduction is not applicable to the year of assessment prior to the year of assessment 2012/13. However, it will not affect taxpayers’ entitlement (including those who had already got the deduction of home loan interest for 10 years of assessment) of the 5 additional years deduction from the year of assessment 2012/13 and onwards. 

With effect from the year of assessment 2017/18, the number of years that home loan interest can be deducted is further increased from 15 to 20 (not necessarily consecutive) years of assessment, with the annual deduction cap remaining at $100,000. 

If you are 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 2022/23. 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 2022/23, the total interest paid amounts to $180,000. Both Mr. A and Mr. B claim a deduction for home loan interest in 2022/23.

Result
The share of interest paid by Mr. A and Mr. B in 2022/23 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 Inland Revenue Ordinance). 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 2022/23 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 Inland Revenue Ordinance).

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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:

1. 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) as shown in the records of the Land Registry;
2. the dwelling is a separate rateable unit under the Rating Ordinance (i.e. it is situated in Hong Kong); 
3. the dwelling is wholly or partly used by the person as his place of residence in the year of assessment (if the dwelling is partly used as the place of residence, the amount of interest deductible will be restricted accordingly); 
4. home loan interest is paid by the taxpayer during the year of assessment on a loan for the acquisition of the dwelling;
5. the loan is secured by a mortgage or charge over the dwelling or over any other property in Hong Kong; and 
6. 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.

How to claim home loan interest deductions for married persons?

The principal residence of a married couple who are not living apart should always be the same. The married couple is unable to claim that their two separate homes, each of which they concurrently own, serve as their principal residences. They are not eligible to deduct home loan interest for various homes they each own independently. The principal residence of a married couple will be determined by the facts of each instance, and the interest paid on that residence will be deductible to its owner(s). For the same time period, the other spouse will not be eligible for any house loan interest deductions. 

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.