How tax deduction works on home loan.

Home Loan - the one you get after the house is purchased (within 30 days of closing ) OR before purchasing the home. ( Low interest  - upto 11% )
Mortgage - After the 30 days of closing - OR after the house is bought - High Interest -15%
e.g: Cost : 40 L
Loan amount : 35 L
EMI - Rs 30K ( or 3.6 L a year )
Interest paid during the year - 2.4 L
Principal - 1.2 lakhs( which comes to 1.2 + 2.4 = 3.6 L above )
If One property - self occupied
- as the house is self occupied - the net value is taken as nil.
- Interest paid on home loan is deductible - Max allowed in 2011-2012 is 1.5L and not 2.4 Lakhs
-So, Income (Loss) under the Head 'Income from house property is 1.5 L - This can be setoff against salary or business Income  
+ the principal repayment , subject to a max of 1L can be claimed under Section 80C ( along with Provident fund and Insurance etc )

Case 2:
Two properties -one self occupied and one let-out.
In addition to one above , if you buy another and rents it out.
Cost : 50L
Loan - 40L
EMI  - 40K ( or 4.8 L a year )
Interest paid is 4.5 L
Principal repaid - 30,000
Rent  received is 50K
Municipal tax - 20,000 per annum
First property is self occupied.
Tax Computation:
For first property - as house is self occupied - the net value is nil.
Interest paid on home loan is deductible, Max allowed is 1.5 L
Income under head' Income from house property ' is 1.5 L

For Second property:
Gross annual value is 6 lakhs ( or 50,000 per month rent )
Less: municipal tax : 20K
Net annual value is 6 L - 20,000 = 5.8 lakhs
Less deductions : 30% of 5.8 lakhs  = 1.74 L

So, net annual value is : 4.06 lakhs ( ?? how )
Less : Interest paid on home loan - 4.5 Lakhs ( not restricted to Rs 1.5 L )
Net income from house property- 44,000
Total loss under Income from house property is 1.5 L + 44,000 : rs 1.94 lakhs
Principal repayment subject to max of Rs 1 ( for both the houses ) can be claimed under 80C

What is Capital Gain Relief :
In case you sell or transfer property, you have to pay C/Gain .
Different rates apply if the house is short-term or long-term.
Long term is assets held for > 36months before they are sold.
 Indexation (??) is available only on long term C/gain. It implies adjusting the cost of purchase of the unit against the cost of purchase of the unit against the cost inflation index as on the date of sale.
Short Term is taxed as regular income.
To avoid Capital Gain - purchase a new property within 3 years of sale.
OR invest them in specified bonds.
Source: Times of India - Grihapravesh edition - 21 Jan 2012.