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 there from.
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 installment, 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.
15.6 Applicability: These amendments have been made applicable with effect from the 1st day of April, 2008 and will accordingly apply in relation to assessment year 2008-09 and subsequent assessment years.
Note:
Extract taken from Explanatory Notes to The Provisions of the Finance Act, 2008 vide circular no. 1/ 2009, dated 27th Mar, 2009.
Whether interest on Reversemortgage is entitled tax relief u/s 24