Jun 27, 2013, 06.19 PM | Source: Moneycontrol.com
Balwant Jain of apnapaisa.com explains about the reverse mortgage scheme launched by the Government of India. He also discusses the income tax benefits under this scheme.
Balwant Jain (more)
Company Secretary, Bombay Oxygen | Capital Expertise: Tax ,Property
With increased urbanization and prevalent nuclear family culture, many senior citizens are forced to fend for themselves. This situation has been aggravated by increase in the cost of living accompanied by longer life expectancy, thus making it very difficult for the senior citizens to make both the two ends meet.
In order to help those senior citizens who own their house but don’t want to sell it, the Government of India introduced reverse mortgage a scheme in 2008.
Also read: Taxability of income from reverse mortgage
Under this scheme, the senior citizens can unlock and tap the value of their residential house while enjoying the benefits of living in the house during their lifetime.
What is the reverse mortgage scheme?
This scheme is exact ‘reverse’ of plain home loan scheme. In case of a home loan one takes a lump sum loan and repays it in instalments in future. Under the reverse mortgage scheme, you get instalments and the loan is repayable in lump sum in future.
Here, the payment stream comes to the borrower for a fixed period of time in the form of monthly, quarterly or yearly payments. The maximum permissible monthly payments under this scheme cannot exceed Rs. 50,000 per month.
You can even get lump sum payments under reverse mortgage loan however the total amount which you can get as lump sum which cannot be more than 50 percent of the total eligibility amount subject to a maximum of Rs. 15 lakh.
The one time lump sum loan can only be taken for the purpose of meeting medical expenses for yourself, your spouse or any dependent person.
The money receivable under regular reverse mortgage scheme money so borrowed can only be used for the genuine needs of the owner like medical emergencies, day to-day expenses, repairs and renovation or repayment of loan taken for the same property.
It is important to note that should not be used for any speculative purpose.
What are the pre-requisite for availing reverse mortgage?
The reverse mortgage loan is available to any person who is owner of a residential house property and has completed 60 years of age. In case of a couple wishing to avail this scheme, one of the spouses should have completed 60 years of age and the other should be over 55 years of age, though it is not necessary that only a couple can avail this loan.
Even a person who is single and a senior citizen, can avail loan under reverse mortgage scheme but the property should be owned by him/ her. In case of couple the property can be owned jointly but in case of single the property should be in the name of the applicant.
You need to mortgage your residential property which is being used by you as your own residence. So the property should be used by the person who is taking this loan as his primary residence.
Moreover the property should be self-acquired, implying you cannot get a loan on inherited property or any property received by you as gift. The loan can only be obtained on residential property situated anywhere in India whether in rural or urban area.
Therefore under this scheme you cannot mortgage any other property like commercial property or other residential property which is let out though owned by you. Even in case of a property on which any loan has been taken cannot be used for taking this reverse mortgage until and unless entire loan has been repaid.
For availing the reverse mortgage loan you have to submit some basic documents like your permanent account number (PAN), list of legal heirs and copy of the registered will. Moreover you need to provide the details like cost and area of the property to be mortgaged.
It is pertinent to note that making and registering of your will is a prerequisite for availing the reverse mortgage. You are required to intimate the lender as and when there is any change in the will.
The reverse mortgage can be availed from any scheduled bank, housing finance company registered with National Housing Bank and the National Housing Bank itself.
What is the tenure, rate of interest and repayment of the loan?
Various banks have devised their own schemes within the framework of the scheme announced by the government. Broadly the tenure of such loan shall not be more than twenty years.
This is the period during which the owner of the house will continue to receive the periodic payments. However in case the borrower outlives the tenure of the loan, the payment stream shall stop but he can still continue to stay in the house.
Even after his death, his spouse can also continue to stay in the same house without having to worry about repayment of the loan. The rate of interest will vary from one lender to another.
The lender will recover normal charges associated with the mortgage like appraisal fee and legal charges for documentation etc. The lender is however required to disclose the fee chargeable in advance. The lenders are free to provide the loans under fixed or floating rate regime.
Once you have obtained reverse mortgage loan, it is not necessary for you to continue with this for the entire tenure of the loan. You can always prepay the outstanding loan and get your documents released any time.
What is the taxation aspect of reverse mortgage?
As per the provisions of income Tax act, 1961, the act of mortgaging the property for the purpose of securing reverse mortgage is not treated as transfer affecting any tax liability. Moreover the money received by the owner of the property under reverse mortgage shall not be treated as income and a specific exemption has been provided under Section 10 (43) of the Income Tax Act.
However it is important to note that as and when the property is disposed of, either by the bank or the borrower or its legal heirs, the normal provisions of capital gains will apply and the owner or his legal heirs shall be liable to pay capital gains tax as per the provisions applicable to general sale of property.
However if the legal heirs decide not to sell the property but pay the outstanding dues fully, no tax implications will arise as redemption of the property does not amount to transfer.
So from the above it becomes very clear that reverse mortgage is the golden walking stick in the hands of senior citizens in their old age and has come to rescue of such senior citizens who stay in their own house.