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Senior Citizens are an increasing component of the Indian Society and depen­dency in old age is increasing in the country. While on the one hand, there is significant increase in longevity and low mortality, on the other hand, cost of good health care facilities is spiraling and there is little social security. Senior citizens need a regular cash flow stream for supplementing pension to her income and addressing their financial needs. Spectacular increase in residential house prices has created considerable “home equity” wealth. For most Senior citi­zens, the house is the largest component of their wealth. Reverse mortgage scheme has proved itself as a boon for senior citizen who do not have a regular income of sources or who do not have children to take care of them in their old age; reverse mortgage has also given a self dependence to them.

Reverse mortgage introduced by Budget 2007, and in Budget 2008-09 has pro­posed to amends the income tax act to clarify tax exemption on reverse mortgage loans. Earlier, the Transfer of Property Act considered any mortgage as a transfer. The IT Act however, had a different definition for transfer. The amendments have been made to the sec­tion 10 of the IT act. The ministry has introduced a new clause 10(a) in section 47 that says a reverse mortgage will not amount to a transfer.

Reverse Mortgage: Meaning

Reverse mortgage is aptly named because payment stream is “reversed”. Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the borrower. The concept is simple, a senior citizen who holds a house or property, but lacks a regular source of income can put mortgage his property with a bank or housing finance company (HFC) or “annuity sourcing institution” (means Life Insurance Corporation of India or any other insurer registered with the Insurance Regulatory and Development Authority inserted by notification no 79/2013 on 7th Oct.2013) and the institution pays the person a regular payment. The good thing is that the person who ‘reverse mortgages' his property can stay in the house for his life and continue to receive the much needed regular payments. So, effectively the property now pays for the owner. So, effectively you continue to stay at the same place and also get paid for it.  

                                                                                                                       

The whole idea is entirely opposite to the regular mortgage process where a person pays the bank for a mortgaged property. Hence it is called reverse mortgage. This concept is particularly popular in the western countries. The draft guidelines of reverse mortgage have the following salient features:

a. Any house owner over 60 years of age is eligible for a reverse mortgage.

b. The maximum loan amount may vary from 60% to 90% of the value of residential property depend on the bank policy.

c. Disbursement of loan. - The approved lending institution may disburse the loan, -

d. to the reverse mortgagor by any one or more of the following modes, namely:-

i. periodic payments to be decided mutually between the approved lending institution and the reverse mortgagor;

ii. lump-sum payment in one or more tranches, to the extent that the aggregate of the amount disbursed as lump sum payments does not exceed Fifty per cent (50%) of the total loan amount sanctioned; or

e. in part or in full, to the annuity sourcing institution for the purposes of periodic payments by way of annuity to the reverse mortgagor.”

f. Period of reverse mortgage loan.- The loan under reverse mortgage shall not be granted for a period exceeding,-

(i) twenty years from the date of signing the agreement by the reverse mortgagor and the approved lending institution, where the loan is disbursed in accordance with clause (a) of Point 3;

(ii) the residual life time of the borrower, where the loan is disbursed in accordance with clause (b) of Point 3.

1. The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.

2. The revaluation of the property has to be undertaken by the Bank or HFC or annuity sourcing institution once every 5 years.

3. The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.

4. Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

Taxability:

A new clause (xvi) in section 47 of the Income-tax Act has been inserted to pro­vide that any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government shall not be regarded as a transfer and therefore shall not attract capital gains tax. Accordingly, in pursuance of above, Reverse Mortgage scheme has been notified vide notification No.93/2008 {S.O No. 2310(E)} dated 30th Septem­ber, 2008. The Act has clause (43) to section 10 of the Income tax Act, 1961 to provide that any amount received by an individual as a loan either in lump sum or in installments in a transaction of reverse mortgage referred to in section 47(xvi) shall be exempt. There will be capital gains tax only at the time of alienation of the mortgage property to repay the loan.

Settlement of a reverse mortgage:

A reverse mortgage loan becomes due when the last surviving borrower dies, or if the borrower chooses to sell the house. Settlement of loan, along with accumulated interest, to be met by the proceeds received out of sale of residential property and any surplus to be paid to heirs. The bank first gives an option to the next of kin to settle the loan along with accumulated interest, without sale of property. If the next of kin is unable to settle the loan, the bank then opts to recover the same from the sale proceeds of the property.

The few conditions to be met for Reverse Mortgage are:

1. Objective of Loan is to address the financial needs of senior citizens owning self occupied property (house) by generating income / supplementing pension / other income, for their day to day requirement.

2. It must be in your name. The borrower should have a clean title. Ancestral properties are therefore discouraged,

3. The borrower should be living in it.

4. The house must be insured with a large residual value, of least 15-20 years.

5. If the borrower is the sole owner of the house, his will should pass it on to his spouse only. He will have to state that this is his last will and he should get it registered.

Other Highlights of reverse mortgage:

a. Prepayment of loan: Borrowers could prepay the loan at any time during the tenor of the loan, at no prepayment penalty or charges.

b. Outliving the tenure of the loan: If the borrower outlives the tenure of the loan, he could continue to stay in the house. The lending institution may however cease the monthly payments. Settlement of the loan is done only after the borrower's death.

c. Death of one of the spouses: If one of the spouses dies, the other can still continue living in the house. Only on death of both, settlement of the loan takes place.

d. Foreclosure: The loan could be foreclosed by the lender if:

i. The borrower has not stayed in the house for a continuous period of one year.

ii. The borrower has not paid property taxes and fails to insure the home.

iii. If the borrower declares himself as bankrupt.

iv. If the mortgaged property is donated or abandoned by the borrower.

v. If the borrower makes changes in the residential property, that could affect the security of the loan for the lender. This could be renting out part or entire house, addition of a new owner to the house's title or creating further encumbrance on the property.

Drawbacks of reverse mortgage

a. Lengthy documentation procedures: Banks require various documents of the property. For a senior citizen this procedure could be tedious, complicated and difficult to understand.

b. Fixed monthly amounts: The monthly payouts are fixed. There is no provision to increase this amount in case of an emergency or contingency.

c. In some cases borrowers will have to give an undertaking that they will not remarry during the currency of the loan. If the borrower chooses to remarry, the loan will be foreclosed.

d. Residential property can’t be rented out fully or partly.

e. Premium of insurance of mortgaged property to bank shall be paid by borrower regularly.

By: CA Gaurav Choradia

Working with a Software Company

Email id: gchoradia@gmail.com


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Category Income Tax, Other Articles by - CA Gaurav Choradia 



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