Direct Tax (Article) Reverse Mortgage Scheme your property pays you a regular income

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1 Direct Tax (Article) Reverse Mortgage Scheme your property pays you a regular income The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it

2 Introduction With increased urbanization and the prevalent nuclear family culture, many senior citizens are forced to fend for themselves. This situation has been aggravated by the increase in the cost of living accompanied by longer life expectancy, thus making it very difficult for the senior citizens to make both ends meet. The reverse mortgage, introduced by the Union Government in 2007, is an answer to such issues faced by the senior citizens, giving them a life of dignity. Under this scheme, the senior citizens can unlock and tap the value of their residential house while enjoying the benefits of living in the house during their lifetime. The scheme was originally named as the Reverse Mortgage Scheme, 2008 applicable w.e.f The said scheme has now been amended by the Notification No. 79/2013, S.O 3034(E) dated and named as Reverse Mortgage (Amendment) Scheme, What is Reverse Mortgage Scheme? The scheme is exact reverse of the conventional home loan. When one buys a house through a home loan, every EMI it pays towards servicing the loan increases its equity in the house. Once loan is paid in full, equity in the house becomes 100 per cent. However, in the reverse mortgage, when one pledges house with the bank its equity decreases with every disbursal that the bank makes to him/her. In case of a home loan, one takes a lump sum loan and repays it in installments in future. Under the reverse mortgage scheme, one gets installments and the loan is repayable in lump sum in future As per the scheme, any person being an individual or any married couple (either of the husband or the wife) of the age of 60 years or above can mortgage its residential house property located in India (hereinafter referred to as capital asset ) for the purpose of obtaining loan from an approved lending institution. The capital asset should be owned by such eligible person and should be free from any encumbrances Approved lending institution means: (a) National Housing Bank established u/s 3 of the National Housing Bank Act, 1987; (b) Scheduled Bank included in the second schedule to the Reserve Bank of India Act, 1934; (c) Housing Finance Company registered with the National Housing Bank How does Reverse Mortgage Works? Any eligible person may enter into a reverse mortgage transaction by applying in writing to the approved lending institution. Such institution then determines the monetary value of capital asset on the basis of the demand for the property, current property prices and the condition of the house. The institution then disburses the loan amount to the borrower in the form of periodic payments, after considering a margin

The reverse mortgage, introduced by the Union Government in 2007, is an answer to such issues faced by the senior citizens, giving them a life of dignity.

3 for interest costs and price fluctuations. The periodic payments also known as reverse EMI are received by the borrower over fixed loan tenure A reverse mortgage loan becomes due when the last surviving borrower dies or if the borrower chooses to sell the capital asset. If the borrower outlives the tenure of the loan, he could continue to stay in the house. Settlement of the loan is done only after the borrower's death. In case of death, the lending institution will first give an option to the legal heirs to settle the loan along with accumulated interest, without sale of such asset. If the legal heirs are unable to settle the loan, the bank then opts to recover the same from the sale proceeds of the asset. Any extra amount, after settlement of the loan will be passed on to the legal heirs. If the sale proceeds are lower than the accrued principal plus interest amount, the loss is borne by the bank Drawbacks in the Scheme There is a lengthy documentation procedure. Banks require various documents of the property. For a senior citizen, this procedure could be tedious, complicated and difficult to understand The monthly pay outs are fixed. There is no provision to increase this amount in case of an emergency or contingency Amendment in the Scheme CBDT vide Notification No. 79/2013 dt has amended the Reverse Mortgage Scheme to provide for disbursing the loan to the annuity sourcing institution for the purpose of periodic payments by way of annuity to the reverse mortgagor. Earlier, the period of reverse mortgage loan was 20 years from the date of signing the agreement by the reverse mortgagor and the approved lending institution. But, now the period has been extended to "the residual life time of the borrower". Annuity Sourcing Institution has been defined to mean Life Insurance Corporation of India or any other insurer registered with the Insurance Regulatory and Development Authority. Tax Implications Section 47 prescribes certain transactions, which are not regarded as transfers which means that no capital gain tax is payable on such transactions. The Finance Act, 2008 inserted clause (xvi) in section 47 w.e.f. assessment year , to provide that nothing contained in section 45 shall apply to any transfer of a capital asset in a transaction of Reverse Mortgage under the scheme made and notified by the Central Government. Thus, the act of mortgaging the capital asset under the reverse mortgage scheme will not be treated as transfer affecting any tax liability. Further, section 10(43) of the Income Tax Act, 1961 provides that any amount received by an individual as a loan, either in lump-sum or in installment, in a transaction of reverse mortgage referred to in clause (xvi) of Section 47 of the Income Tax Act, 1961, shall not be included in total income. Thus, the amount received through reverse mortgage is considered as loan and not income and hence the same will not attract any tax liability.

chooses to sell the capital asset. If the borrower outlives the tenure of the loan, he could continue to stay in the house. Settlement of the loan is done only after the borrower's death.

4 However, as and when the property is disposed of, either by the approved institution or by the borrower or its legal heirs, normal provisions of capital gains will apply and the owner or his legal heirs shall be liable to pay capital gains tax as per the provisions applicable to the general sale of property. General Guidelines The RBI has formulated the following guidelines for a reverse mortgage: Maximum loan amount would be up to 60% of the value of the residential property Maximum tenure of the mortgage is 15 years and minimum is 10 years. Some banks are now also offering a maximum tenure of 20 years Option of monthly, quarterly, annual or lump sum loan payment. However, the aggregate of the amount disbursed as lump sum payments will not exceed 50% of the total loan amount sanctioned Property revaluation to be undertaken by the lender once every 5 years 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 Conclusion Though, the scheme was launched w.e.f , it did not attract the desired number of persons. It would take some time for a change in the mind set of individuals to accept it. Further, the scheme has been fine-tuned by way of recent amendment made to it by notification dated The scheme is a golden walking stick in the hands of senior citizens during their old age as it ensures regular source of income to them. It is hoped that more people will now come forward to take the benefit of this scheme.

General Guidelines The RBI has formulated the following guidelines for a reverse mortgage: Maximum loan amount would be up to 60% of the value of the residential property Maximum tenure of the

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Direct Tax (Article) Tax Provisions for Senior Citizens in India

Direct Tax (Article) Tax Provisions for Senior Citizens in India The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or