The reverse mortgage scheme has been in operation for quite some time in the Indian economy but this has not had the kind of impact that was initially expected.
By Arnav Pandya
The reverse mortgage scheme has been in operation for quite some time in the Indian economy but this has not had the kind of impact that was initially expected. A lot of people are also not very clear about several of the tax implications that arise in the process especially that with regard to the manner in which the flows from the bank to the senior citizen are concerned. There is a worry on this front because of the fact that if a part of this is suddenly considered as income then it could lead to a tax burden which can upset the calculations however there is nothing to worry about because this is not an element of income and hence has to be considered separately.
Manner of working
Under a reverse mortgage scheme the senior citizen is the owner of a house property. The senior citizen in this case usually has a valuable asset in the form of a house property. Since this is not a cash flow generating asset the reverse mortgage scheme is a way to monetise the asset and ensure that there is some liquidity that is built up. The senior citizen will mortgage the property with a bank or financial institution and the lender will then pay the senior citizens instalments over their life time. The main benefit of the whole exercise is that the senior citizen can continue to stay in the property till the time that they are alive so this provides them with double benefits with respect to the property.
The key question of repayment of the amount given to the senior citizen is also taken care of under the scheme. There is no need for the senior citizen to repay the loan with interest while they are alive. After their death the bank will sell the property and then recover the loan and the interest. At the same time the family member also have an option to repay the loan and take back the property that has been mortgaged. If there is an excess amount over and above the value of the loan and interest that is recovered by the bank then this would be paid to the legal heirs. This completes the transaction and hence it is something that will need to be considered carefully by the individual before they make a final decision.
There is a flow of money that is coming to the senior citizen from the reverse mortgage transaction each month. The question now is the nature of this flow because if this is considered as income then there could be the question of tax having to be paid by the senior citizen because they are receiving the amount. This could put a dent in the financial calculation. However there is good news on this front and there is nothing to worry about for the senior citizen. The amount that is actually received by them from such a reverse mortgage transaction would be considered tax free in their hands as this is not income. It is actually in the nature of a loan being given by the bank.
Since there is a loan transaction that is taking place the amount that is paid each month becomes a debt for the receiver who is the senior citizen. This amount is specifically mentioned as being tax free in their hands so there is no question of a tax impact arising in the process. This will protect the individual and ensure that there is no financial burden on them in case there is such a receipt. This is a good thing as it will provide a lot mental relief for the individual.
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