Jigar M. Patel
International Tax Attorney
Shantibhai, a senior citizen aged 75, is living in his house at Ahmedabad, the present market value of which is Rs.50 lakhs. Since their children have neglected them, the couple are all on their own, having scarce financial resources to maintain even a decent livelihood. Their grave concern and dilemma are that if they opt to sell their house to raise funds, they are rendered homeless, and if they go for a normal borrowing against the mortgage of their house, they may just not be able to repay the instalments of principal and interest.
The ‘Reverse Mortgage Scheme’ by Banks and Housing Finance Institutions provides a perfect avenue to this couple and many other senior citizens to extract value out of their property without selling it off. Shantibhai, in his case, can expect around Rs. 20 lakhs as a single payment loan or Rs. 10,000 as monthly advance.
What is a ‘reverse mortgage’?
A ‘reverse mortgage’ product is one where a senior citizen can mortgage his or her property and receive either a lump sum or regular installments from the lender, being a bank or a housing finance company. This can be either for a fixed period or until the time the senior citizen dies. After the fixed period or the demise of the senior citizen, the bank or the lending institution gets to recover its ‘loan’, by selling the property and the equity left after payment to the lender towards the principal and the interest is paid to the estate or heirs of the borrower just like any conventional mortgage. The estate of the deceased is also given an option to repay the loan amount with the interest due thereon and get the mortgage released.
As long as the borrower or the co-owner (spouse) stays in the house, loan taken against it need not be repaid. The loan is repaid only when the borrower sells the house or no longer lives therein. It helps the house-owner meet his/her financial needs while still residing in the home.
Eligibility under the Reverse Mortgage Scheme
As per the ‘Reverse Mortgage Scheme’, an individual aged 60 years or above and in the case of a married couple, where either the husband or wife is atleast 60 or above, will be treated as an eligible reverse mortgagor to avail the above benefits. Any eligible person may enter into a reverse mortgage transaction by applying in writing to the approved lending institution, if the capital asset being a residential house property located in India, which is mortgaged is owned by him and is free from any encumbrances.
Tax Benefits for Reverse Mortgage
As per the exceptions to transfer laid down under Section 47(xvi) of the Income-tax Act, any transfer of a capital asset in a transaction under a Notified Reverse Mortgage Scheme will not be treated as a transfer and shall not attract any taxable capital gains.
Further, under Section 10(43) of the I.T. Act, it has been provided that any amount of loan, received either in lump sum or instalment, if received under a Notified Reverse Mortgage Scheme shall be treated as exempt from income tax. Comfort of enjoying one’s home while generating steady income for the borrower and security of mortgage based on the value of the property for the lender, makes it a win-win situation for both the senior citizens, as well as the lending institutions.
