What is Reverse mortgage and how does it operate?
It is a type of mortgage in which an owner of a residential property in Indian can borrow money against the value of his or her home. A reverse mortgage provides stream of income flows which normally senior citizens can tap into for their retirement. Borrower need not have any income nor is his credit record relevant as the loan is being secured by the underlying property.
Under the reverse mortgage, borrower will have various options to receive the loan, either lump-sum, monthly payments or a line of credit. Amount received not considered as income chargeable to tax since the loan advances are disbursement of the principal and not income. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. The loan amount can either be repaid by the borrower, his/her legal heirs.
All one needs to ensure to avail a reverse mortgage loan is to have an own house with no encumbrances.
Tax breaks for reverse mortgages
The reverse mortgage scheme has been announced in budget 2007 with a view to provide a stream of cash flow to needy senior citizens against mortgage of their residential house. There were areas of confusions which were addressed subsequently in the Finance act, 2008 where in the following two amendments were made effective FY 2007-08 which cleared off all the confusions:
a. Though mortgage of property under transfer of property act is treated as transfer, a new provision has been made under section 47(xvi) of the income tax act to provide that any transfer of capital asset in a transaction under notified reverse mortgage scheme will not be treated as transfer and shall not attract any taxable capital gains.
b. A new provision u/s 10(43) of the income tax act has been introduced to clarify that any amount of loan, received either in lump sum or installments under a notified reverse mortgage scheme shall be treated as exempt from income tax.
Further, the Central Government has also notified ‘Reverse mortgage scheme, 2008’ vide notification No. 93/2008 dated 30-09-2008. As per the notification, the reverse mortgage benefits can be availed by an individual who is 60 years or above as on the date of application for loan to the approved financial institutions. Such an eligible person has to apply for the loan under this scheme in writing to the approved financial institution. Only thing he/she needs to ensure is that the residential house property is located in India and it is free from any encumbrances.
The approved financial institution being any scheduled bank of housing finance company may disburse the loan to the reverse mortgagor by any one of the following modes namely.
a. Periodic payments to be decided mutually between the institution and the reverse mortgagor.
b. Lump sum payment in one of more tranches, to the extent that the aggregate of the amount disbursed as lump sum does not exceed fifty percent of the total loan amount sanctioned.
The loan so granted under reverse mortgage shall not be for a period of more than 20 years from the date of signing the agreement by the reverse mortgagor and the approved financial institution. The reverse mortgagor, or his legal heirs or estate, shall be liable for repayment of the principal amount of loan with interest to the approved lending institution at the time of foreclosure of the loan agreement.
Almost all the banks in India have their own sweet reverse mortgage plans!