CA Garima Mittal

CA Garima MittalIntroduction

Reverse mortgage as its name implies is the reverse of a traditional mortgage such as home loan. In case of traditional mortgage, lump sum amount is borrowed to purchase or refinance home, then we pay it back in monthly instalments. However, reverse mortgage is just an opposite, lender pays you. Reverse mortgage is a special type of home equity financing, i.e., it is a special type of loan against home that allows the borrower to convert a portion of equity in the property into cash. In simpler words, in reverse mortgage, those senior citizens who are owner of self-occupied property can mortgage it to financial institution in order to earn a regular income from them at a defined rate of interest.

Reverse mortgage is considered a golden walking stick for those senior citizens who are having limited income, generally pension or lacks regular income and lack financial support from children. Reverse mortgage was introduced in 2007 by Union Government in India.  Reverse mortgage concept is very popular in Western countries like in United States (US), though it is less effective in India. In India, it is less effective due to its two reasons, firstly due to lack of awareness, since it’s a new concept launched just 9 years back and not in the highlights of common man and secondly, due to it’s criticism which is described in detail in below section.

Some Important facts:

Though while explaining the concept, most the pre-requisites covered already, however, it is always better to have it in one go for easy avail of reverse mortgage scheme. Please note that below are pre-requisites & salient features for availing reverse mortgage in India.

  • Indian citizen above 60 years
  • Owns self-acquired and self-occupied residential property in India
  • Married couples would be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at discretion of the lending institution, subject to at least one of them being above 60 years of age.
  • Property should be free from any encumbrances.
  • The life of the property should be minimum 20 years
  • Maximum loan amount would be generally up to 60% of value of residential property. Though the maximum amount could differ depending upon the bank policy.
  • Maximum tenure of the mortgage is 15 years and minimum is 10 years. Some banks are now offering up to 20 years.
  • Option of monthly, quarterly, annual or lump sum loan payment
  • Property revaluation to be undertaken by the lender at periodic intervals.

The value of loan is based on several factors like borrower’s age, value of property, current interest rates and specific plan chosen. Borrower’s age and value of home combined is directly proportional to income, i.e., higher the borrower’s age and higher the value of property, the more money is available.

For availing reverse mortgage, submission of basic documents is necessary like PAN, list of legal heir and copy of registered will. Details like cost and area of the property to be mortgaged also required.

Benefits of Reverse Mortgage:

Tax free-income supplements, retained ownership, no repayments, freedom and flexibility are some important benefits of reverse mortgage. Reverse mortgage is very lucrative especially since it can be used for reducing dependency and to meet the medical and other costs & to meet basic amenities, problems of which are generally associated more with older age in the light of limited income (i.e. pension) or no income.

Criticism in India

Though reverse mortgage is considered a source of survival for senior citizen, but some also called it a last resort.

Reverse mortgage is having lengthy documentation process; senior citizen may consider it tedious. Further, some others factors like residential property can’t be rented out fully or partially discourages the people to take up this scheme. Further, if the borrower outlives the loan tenure, he/she can continue to live in the house, but living without this monthly income would be difficult. Payouts also can’t be increased in case of emergency. For removing that scenario, you have to take insurance which will increase your cost, i.e., premium. Further, there are some psychological factors also, for example, there are lot of emotions attached to family property due to which people resist in using this scheme.

Taxation Viewpoint

Under reverse mortgage scheme, there are two generally trigger points where taxability can arise in this scheme other than settlement period if reading the context in flow, firstly in case of transfer of capital asset and secondly, when having receipt of income, hence, Finance Minister inserted the specific clauses mentioned below in the Income Tax Act, 1961 in order to make this scheme tax free for the sake of senior citizen.

Since the intention of reverse mortgage is to secure a stream of cash flow against the mortgage of a residential property and not to alienate the property, hence Finance minister in Union Budget 2007-08 inserted a new clause (xvi) in section 47 of Income Tax Act, 1961 to provide that any transfer of a capital asset in transaction of reverse mortgage under a scheme made and notified by Central Government shall not be considered as a transfer. With respect to receipt of loan, Section 10 of the Income Tax Act, 1961 has been amended to provide that any amount received by an individual as a loan, either in lump sum or in instalment, in a transaction of reverse mortgage referred to in section 47(xvi) of the Act shall not be included in income.

Hence, taxability under reverse mortgage will arise only at the point of alienation of mortgage property for the purpose of recovering the loan.

Conclusion

Reverse mortgage is rather unconventional retirement tool. It is a boon for the asset rich and income poor population. However, its acceptance has been very cautious even in countries where it has been around for quite a while.

(For queries, author can be reached at garimamittal@live.in)

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  • Ca Mukund Asthana

    Great one

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