1.In this case,ideally you should receive rent from partnership firm.For the rent,you will be taxed and the firm can claim deduction as this is business expense for it.This is because,if you have two houses,only one,as per your choice will be treated as self occupied.For the other,you will be taxed as if it is on rent(on fair rent in that area for similar house) and the provisions of law will apply accordingly.For the house that is treated as self occupied,you will get interest deduction upto Rs 1,50,000 and for the house that is on rent or deemed to be on rent,you will get interest deduction without any limit,on the entire interest accrued for that year. 2.It is not advisable to close the loan as deduction of Rs 1,50,000 on interest is still avilable and it can be set off against the income from the other house.Even if it cannot be set off fully in that year it can be carried forward and set off against income from house property in later years (upto 8 assessment years).You just said that one house of your wife is on rent,so that rental income is taxable.She can claim the set off of interest from this rental income.
