The central government introduced the reverse mortgage scheme in 2008. Under the scheme, senior citizens were provided with a facility to get money, in the form of monthly or lump-sum payments, or a combination of both, against security of the residential house owned by them. Under this scheme, the senior citizen can continue to stay in the same house till his or her demise. The spouse can also continue to stay in the house until his/her death, even after the applicant’s demise. Moreover, the senior citizen is not required to service the loan as long as they live, although s/he can foreclose the loan of the legal heirs, pay the loan amount and get the property redeemed.
Despite its noble intentions, the scheme has not taken off. Here’s why:
Restrictions on amounts available under the scheme
Under the scheme, the monthly amount that a senior citizen can get, is capped at Rs 50,000. This limit was fixed in 2008 and has not yet been revised, even though prices of homes have gone up substantially during this period. The cost of living too has gone up, during this period. Consequently, the ratio, between the loan available and the value of the property, is absurd and senior citizens are unwilling to mortgage their property for the substantially low amount of loan available.
In addition to monthly payments, the scheme also envisages a lump-sum payment of 50% of the eligible amount based on the value of the property, or Rs 15 lakhs, whichever is lower. Moreover, the lump-sum so withdrawn, can only be used for medical treatment of the senior citizen, spouse or any dependent, or for renovation of the property, thereby, making the scheme unattractive.
Taxes
The act of mortgaging the property, is not treated as a transfer, for the purpose of capital gains under Section 47 (xvi) of the Income Tax Act. Hence, there is no tax liability at the inception of the reverse mortgage. Monthly or lump-sum payments received from the bank, are also exempt under Section 10 (43) of the Income Tax Act.
In addition to obtaining periodic or lump-sum payment from banks, a senior citizen can opt to purchase an annuity from a life insurance company. Under this option, the bank disburses the loan to the insurance company. This transaction is exempt from tax. However, although the monthly / lump-sum payments received from the bank are exempt from tax, the annuity received from the insurance company, remains taxable. This defeats the very purpose of using the reverse mortgage scheme, to buy the annuity. As the government does not have any social security system in place, it should at least make this annuity tax-free, to ensure decent money in the senior citizens’ hands.
Social stigma
Many senior citizens tend to feel guilty, about borrowing against their residential house property and thus, leaving a debt for their children. Although this attitude is slowly changing, it will take some more time for this stigma to completely disappear.
(The author is a taxation and home finance expert, with 30 years’ experience)
Balwant Jain is a tax and investment expert. He is a rank holder CA, CS of 1983 batch and a Certified Financial Planner (CFP). He has varied experience in providing his own consultancy, as well as working as the chief financial officer, as well as a company secretary. He has been regularly contributing articles to leading business and mainline dailies, as well as electronic media. He regularly appears on business channels like Zee Business and CNBC Awaaz, as a personal finance and taxation expert. He has also been a visiting faculty of NMIMS (Narsee Monjee Institute of Management Studies), Mumbai. He also regularly conducts workshops on various subjects of investments and taxation.
Twitter: https://twitter.com/Jainbalwant
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