Reverse Mortgagae Scheme and Tax implications

Querist : Anonymous (Querist)
01 July 2011

A reverse mortgage scheme for old people to sppliment their income is there. In this scheme, the borrower is paid monthly installment , till certain period. Thereafer at the end of period , or on happening of certain event (eg- death , etc) the loan is repaid in full ( or by selling property). Is there any tax implications/ benefit of such scheme?

In my opinion, the monthlty installments which borrowers get , is not an income , but a part of loan only. Further no interest cost benefit is there.Kindly answer this question on tax implications of such scheme.

B.Chackrapani Warrier (Expert)
01 July 2011
The periodical amount received through reverse mortgage is considered as loan and not income, hence the same will not attract any tax liability.
On the sale of property by the lender on the demise of the borrower, capital gains attracts. Since the loan is self created by the demised owner, principal and interest can't be deducted from the sale value for computing CG.

03 July 2011
15 Amendment to give effect to reverse mortgage scheme
15.1 The Finance Minister, in paragraph 89 of his speech, while presenting the Union Budget, 2007-08, had announced that the National Housing Bank (NHB) will introduce a reverse mortgage scheme for senior citizens. In pursuance of this announcement, some of the banks have already formulated scheme for reverse mortgage.

15.2 In the context of the aforesaid scheme, it has been necessary to resolve the tax issues arising therefrom.

15.3 The first issue is whether mortgage of property for obtaining a loan under the reverse mortgage scheme is transfer within the meaning of the Income Tax Act thereby giving rise to capital gains. Sub-section (47) of section 2 of the Income Tax Act provides an inclusive definition of transfer. Further, transfer within the meaning of the Transfer of Properties Act includes some types of mortgage. Therefore, a mortgage of property, in certain cases, is a transfer within the meaning of sub-section (47) of section 2 of the Income Tax Act. Consequently, any gain arising upon mortgage of a property may give rise to capital gains under section 45 of the Income Tax Act. However, in the context of a reverse mortgage, the intention is to secure a stream of cash flow against the mortgage of a residential house and not to alienate the property. Therefore 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.

15.4 The second issue is whether the loan, either in lump sum or in instalment, received under a reverse mortgage scheme amounts to income. Receipt of such loan is in the nature of a capital receipt. However with a view to providing certainty in the tax regime to the senior citizen, section 10 of the Income tax Act has been amended to provide that such loan amounts will be exempt from income tax.

15.5 Consequent to these amendments, a borrower, under a reverse mortgage scheme, will be liable to income tax (in the nature of tax on capital gains) only at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.

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