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LIFE IN FORWARD GEAR WITH REVERSE MORTGAGE!

Needy Senior Citizens can raise Funds against their House Without any pressure for Sale or concern for Borrowing

          Chinubhai Raval, a senior citizen aged 70, is living in his house at Ahmedabad, the present market value of which is Rs.25,00,000. Since their children have neglected them, the Raval couple is all on their own, having scarce financial resources to maintain even a decent livelihood. Their grave concern and dilemma is that if they opt to sell their house to raise funds, they are rendered homeless, and if they go for a normal borrowing against the mortgage of their house, they may just not be able to repay the installments of principal and interest.

          The ‘Reverse Mortgage Scheme’ introduced by Banks and Housing Finance Institutions provides a perfect avenue to the Raval couple and many other senior citizens to extract value out of their property without selling it off. Going by the standard norms on the subject, Shri Raval in his case can expect around Rs.10,00,000 as a single payment loan or Rs.5,000 as monthly advance for a 15 year term.

WHAT IS ‘REVERSE MORTGAGE’?

                A ‘reverse mortgage’ product is one, where a senior citizen can mortgage his or her property and receive either a lump sum or regular installments from the lender, being a bank or a housing finance company. This can be either for a fixed period or until the time the senior citizen dies. After the fixed period or the demise of the senior citizen, the bank or the lending institution gets to recover its ‘loan’, by selling the property and the equity left after payment to the lender towards the principal and the interest is paid to the estate or heirs of the borrower just like any conventional mortgage. The estate of the deceased is also given an option to repay the loan amount with the interest due thereon and get the mortgage released.

                As long as the borrower or the co-owner (spouse) stays in the house, loan taken against it need not be repaid. The loan is repaid only when the borrower sells the house or no longer lives therein. It helps the house-owner meet his/her financial needs while still residing in the home.

               Vide Notification No. 93/2008 dated 30-9-2008, the Central Government has notified the ‘Reverse Mortgage Scheme, 2008.’ As per the same, an individual aged 60 years or above and in the case of a married couple, where either the husband or wife is 60 or above, will be treated as an eligible reverse mortgagor to avail the above benefits. Any eligible person may enter into a reverse mortgage transaction by applying in writing to the approved lending institution, if the capital asset being a residential house property located in India, which is mortgaged is owned by him and is free from any encumbrances.

               The approved lending institution being any scheduled bank or housing finance company may disburse the loan to the reverse mortgagor by any one or more of the following modes, namely:

  • periodic payments to be decided mutually between the institution and the reverse mortgagor.

  • lump-sum payment in one or more trenches, to the extent that the aggregate of the amount disbursed as lump sum payments does not exceed fifty per cent of the total loan amount sanctioned.

              The loan under reverse mortgage shall not be granted for a period exceeding twenty years from the date of signing the agreement by the reverse mortgagor and the approved lending institution. The reverse mortgagor, or his legal heirs or estate, shall be liable for repayment of the principal amount of loan along with the interest to the approved lending institution at the time of foreclosure of the loan agreement.

TAX SHELTERS FOR REVERSE MORTGAGE

              Budget 2007 had announced the implementation of the reverse mortgage scheme, with a view to provide a stream of cash flow to needy senior citizens against mortgage of their residential house.  However, the scheme had not taken off as desired, mainly on account of some tax doubts involved in the matter.  Happily, the Finance Act, 2008 made the following two important amendments effective from FY 2007-08 to put the concerned doubts at rest:

  • Though mortgage of property under the Transfer of Property Act is treated as transfer, a new provision has been made under Section 47(xvi) of the Income-tax Act to provide that any transfer of a capital asset in a transaction under a Notified Reverse Mortgage Scheme will not be treated as a transfer and shall not attract any taxable capital gains.  

  • A new provision under Section 10(43) of the Income-tax Act has been introduced to clarify that any amount of loan, received either in lump sum or installment received under a Notified Reverse Mortgage Scheme shall be treated as exempt from income tax.

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