Deduction for Home Loan Interest
Taxpayers can claim deductions for home loan interest (HLI) under salaries tax and personal assessment. This article covers eligibility for deductions, scenarios under which you can make a claim, how deductions are allowed to married couples, the time limit on revoking your claim, and the type of supporting documents you need to keep.
Eligibility for Deductions
The HLI that you pay is deductible from your net assessable income under salaries tax or from your total income under personal assessment. Any person whose income is chargeable to tax at the standard rate is also entitled to a deduction.
All of the following conditions must be satisfied before a deduction is granted:
- you are the owner of the dwelling (either as a sole owner, a joint tenant or a tenant in common) and ownership is by reference to the registered owner of the property as shown in the records of the Land Registry;
- the dwelling is a separate rateable unit under the Rating Ordinance: that is, it is situated in Hong Kong;
- the dwelling is used wholly or partly as your 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);
- you pay HLI during the year of assessment on a loan for acquisition of the dwelling;
- the loan is secured by a mortgage or charge over the dwelling or over any other property in Hong Kong; and
- the lender is an organization prescribed under section 26E(9) of the Inland Revenue Ordinance (IRO), that is,
(a) the Government,
(b) a financial institution,
(c) a registered credit union,
(d) a licensed money lender,
(e) the Hong Kong Housing Society,
(f) your employer, or
(g) any organization or association approved by the Commissioner of Inland Revenue.
Car Parking Spaces
Subject to the fulfilment of other criteria for entitlement, home loan interest paid for the acquisition of a car parking space is deductible if that space is for use by the owner and located in the same development as the dwelling for which HLI is also claimed for the same year of assessment.
Amount of Deduction
The HLI that you actually paid in the year of assessment is deductible, subject to a maximum limit for the year of assessment as specified.
Year of Assessment
To help you understand how deduction amounts are determined, the Inland Revenue Department provides a list of 20 scenarios.Different Scenarios on Deduction of Home Loan Interest
The more common situations are also explained in the following subsections, with links to the relevant scenarios.
If you are a sole owner of the dwelling and use it exclusively as your place of residence, the HLI that you actually paid in the year of assessment is deductible, subject to a maximum limit as specified for the year.Scenario 1: Solely-owned dwelling exclusively used as residence throughout the year
Joint Tenant or Tenant in Common
The HLI 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. If you are a joint tenant or tenant in common of the dwelling, the amount of apportioned HLI may be claimed as deduction.Scenario 5: Dwelling owned by joint tenantsScenario 6: Dwelling owned by tenants in common
Mortgage Loan Not Applied Wholly for Acquisition of Dwelling OR Partial Use for Purposes Other than Dwelling
If the mortgage loan you obtained is partly for the acquisition of a dwelling as your residence and partly for another purpose, the amount of deductible HLI will be reduced accordingly. Where the dwelling itself is used partly for purposes other than your residence, the amount of deductible HLI will also be reduced accordingly.Scenario 7: Mortgage loan not applied wholly for acquisition of the dwellingScenario 8: Re-mortgage of dwelling – loan applied wholly for other purposes
Interest Paid Before Dwelling is Used
Interest paid before the dwelling is used as your residence (such as during the construction period) is not deductible.Scenario 2: Mortgage loan interest paid during construction period
Multiple Places of Residence
If you own more than one place of residence, you are only entitled to claim the deduction for your principal place of residence. Likewise, if both you and your spouse each own a dwelling separately, only one of you is entitled to claim the deduction for the dwelling that you both regard as your principal place of residence.
Number of Years of Deduction
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 of deduction for home loan interest is further extended from 15 to 20 (not necessarily consecutive) years of assessment*, while maintaining the current deduction ceiling of $100,000 a year.
* Legislative amendments are required for implementing the tax measures as proposed by the Financial Secretary in the 2017-18 Budget.
If you are granted a deduction for a particular year of assessment, your deduction status will be shown in a notification from the Commissioner.Scenario 19: During the years of assessment from 1998/99 to 2011/12, the taxpayer has claimed deduction of home loan interest for 10 years. How to claim his/her further deduction which effective from 2012/13Scenario 20: Taxpayer had already got 8 years of home loan interest deduction during the years of assessment 1998/99 -2011/12. The number of years that he can claim deduction as from the year of assessment 2012/13
Deductions for Married Persons
If you are married, there are 4 situations under which you can claim a deduction for HLI. The following subsections describe those situations, with links provided to relevant scenarios.
Separate Taxation of Husband and Wife Under Salaries Tax
In general, the income of a husband and wife is assessed separately under salaries tax. If the property is jointly owned by you and your spouse, deduction of share of HLI can be claimed in the tax returns separately.Scenario 14: Property owned jointly by a husband and wife both with income exceeding their respective personal allowances and home loan interest paid
Joint Assessment Under Salaries Tax
If you and your spouse both have assessable income chargeable to salaries tax and one of you has income less than the total of allowable HLI and personal allowances, (that is, exempt from salaries tax), you and your spouse can elect joint assessment so that the interest is deductible from the aggregate assessable income.Scenario 15: Income from employment less than the total of home loan interest and personal allowances
Nomination of Spouse to Claim the Deduction
Under section 26F of the IRO, if either a husband or a wife, as owner of the dwelling, has no salary income, rental income or profits chargeable to tax during the year of assessment, he or she may nominate the other spouse to claim the deduction. “No profits chargeable to tax” includes a loss case. You should note here that nominations are restricted to spouses. A father, for instance, cannot nominate his son to receive his entitlement.
Nominations must be made year by year, and the nominating spouse must sign the nominee’s tax return to signify his or her agreement to the nomination. The owner (but not the spouse to whom the deduction is actually granted) is regarded as having been allowed the deduction for a year of assessment.
Deductions for HLI are only allowable under salaries tax or personal assessment. Hence, if your spouse (as owner of the dwelling) does not have a salary income but does have other chargeable income (such as rental or business income), as a married couple you and your spouse have to elect for personal assessment to claim your spouse’s HLI entitlement.Scenario 17: Home loan interest deducted from a married person’s total income under personal assessment
If you and your spouse elect for personal assessment, the allowable HLI is first deducted from the total income of the one who paid the HLI. Any part of the deduction not fully utilised is then set off against the other’s total income. However, any excess would not be carried forward for setting off against either one’s total income for future years of assessment.Scenario 17: Home loan interest deducted from a married person’s total income under personal assessment
Other Points to Note
You should also note the following important points.
- If you claim a deduction but your assessable income is less than your personal allowances (that is, you are exempt from tax even if the interest deduction is not granted) and your HLI is not transferred to your spouse, you will not be regarded as having been allowed that deduction. No deduction status notification will be issued in such cases.
- Only married persons can nominate his/her spouse to claim HLI under section 26F of the IRO.
- The Commissioner issues deduction status notifications to taxpayers who have been allowed the deduction in their own right or who have made nominations under section 26F of the IRO.
Scenario 13: Taxpayer is single and his income is less than personal allowances
How to Lodge a Claim
You should claim your deductions in Parts 7.1 and 7.3 of the Tax Return – Individuals (BIR60) for the relevant year of assessment. If the interest payments involve a re-mortgaged loan or a second mortgage, you should also complete Part 7.4.
You need not attach any proof of interest paid when you file your tax return. However, you should retain the receipts for a period of 6 years after the expiration of the year of assessment in which the payments were made. You are required to produce receipts if your case is selected for review. In processing the claim, the Assessor may ask you to produce the following documents:
- proof of your ownership;
- proof of the dwelling being used as your place of residence;
- loan agreement or mortgage deed; and
- receipts for repayment of the loan.
Revocation of a Claim
If a deduction has been allowed but you need to revoke your claim for that deduction, you should do so in writing within 6 months following the date of the Commissioner’s notification.
Offences and Penalties
The IRO imposes heavy penalties on any person who without reasonable excuse:
- makes an incorrect statement in connection with a claim for any deduction or allowance; or
- gives any incorrect information in relation to any matter or thing affecting his own liability for tax or the liability of any other person.
If you need to know more about deductions for home loan interest you can ring the Inland Revenue Department at 187 8088 or obtain information on the following links.Departmental Interpretation and Practice Notes No. 35(Revised): Concessionary Deductions: Sections 26E and 26F - Home loan interest (pdf file)
Note : Applicable up to the year of assessment 2011/12Frequently asked questions on deductions for home loan interest