Abstract

With healthcare expenses on the rise and little social security, living the golden years respectfully can be quite a challenge for senior citizens, many whose major assets are their homes built over a lifetime of service. With the introduction of the Reverse Mortgage scheme last year, followed by the clarifications in the current budget, these homes turn out to be the geese with the ‘golden eggs’, providing a regular stream of income that can help them live in dignity, says Ameet N Patel, Chartered Accountant

For senior citizens in several countries, the Reverse Mortgage Scheme offers much solace in terms of providing sorely needed funds when they are most required ie, in the evening of one’s life. In India, after much deliberation, the Government finally listened to senior citizens and brought in certain provisions in the Budget of 2007 for making it available to them.

A Mortgage in Reverse?

Since this product is of great relevance to all seniors, let me first give a very brief introduction of the same. Nowadays, it is quite common for senior citizens to live alone without their children. In many cases, the offspring have migrated to foreign countries, leaving the old parents to fend for themselves in India. Such couples are unable to cope with the rising inflation, mainly in costly cities like Mumbai (yes, there is a galloping inflation in India, notwithstanding the figures given by the Govt to the media). In all such cases, paradoxically, the old couple owns a house which, on paper, is worth lakhs/crores but at the same time, they don’t have enough money/income to ensure a comfortable living, which would cover the huge costs of medication and healthcare.

The Reverse Mortgage Scheme is aimed at allowing a senior citizen to encash his/her immovable property and at the same time, enjoy the property in his/her/their lifetime. It enables them to receive money in the form of regular payments or a lumpsum one-time payment by pledging their homes. This amount is NOT to be repaid by the receiver. However, on the death of the senior citizen and the spouse, the bank recovers the loan amount by selling the house. The legal heirs of the deceased also have the option of repaying the loan and redeeming the mortgage. Thus, with the help of this product, a senior citizen couple can lead a comfortable, dignified life with the help of money raised on the security of their own property. They don’t have to depend on anyone else for their financial needs. This is a great morale booster and allows the older generation to retain their self respect.

Clarity Comes Now

However, considering how complex our tax laws are, several questions were raised about the scheme. In this year’s budget, the Finance Minister has sought to clear all doubts. Therefore, now the way is clear for banks to make the Reverse Mortgage Scheme available to senior citizens.

Let’s take a look at what the issues were and how the FM has dealt with them in this year’s Budget…

The first question that arose was whether the mortgage results in a ‘transfer’ of the property or not. For the benefit of the readers, suffice it to say that under our Income-tax (IT) Act, if there is a ‘transfer’ of property, the transferor would have to pay tax on the capital gains arising on it. The definition of transfer’ is very wide and may also cover a mortgage. Therefore, there was a possibility, however a distant one, that a reverse mortgage may be treated as a ‘transfer’, resulting in capital gains. If this happens, the senior citizen may be liable for capital gains tax at the initial stage itself when he doesn’t have the money to pay the tax.

The other question that arose was whether the amount received by the senior citizen on the mortgage of the property is ‘income’ or not. Again, for the benefit of the reader, ‘income’ as defined in the IT Act is taxable in India unless it is specifically exempted. The definition of ‘income’ is very wide under this Act. Again, there were some doubts prevailing that the amount received by a person from a bank on a regular basis could be treated as an “annuity” liable for income tax. If this happens, then, again, the senior citizen would have to pay tax on this amount. This too would have defeated the purpose of the scheme.

Therefore, the Govt has now clarified the position and has proposed suitable amendments in the Income-tax Act to ensure that:

• The act of creating a reverse mortgage will not be considered as a ‘transfer’ for the purposes of the IT Act. This means that when a senior citizen opts for a reverse mortgage on his property, he will not have to pay any capital gains tax at the time.
• The amount received by the mortgagor from the bank/institution against the reverse mortgage will not be considered as ‘income’ in his hands. Means, he will not have to pay any income-tax on such receipts.

With these amendments, a greater clarification has been bestowed upon the possible tax consequences of the Reverse Mortgage Scheme. One hopes that most banks would now bring out attractive schemes for senior citizens. Considering the ridiculous prices that our real estates are fetching nowadays, senior citizens living in good localities would be able to get a good stream of revenue without having to pay any tax on it.

Now, how is that for an election year budget?

(The author is a member of Bombay Chartered Accountants’ Society.)