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Reverse mortgage for senior citizens - whether it will help?

Can you explain whether reverse mortgage is a method of tax planning for senior citizens?

Reverse mortgage is not so much a matter of tax planning as one of finding liquidity for a senior citizen for his living expenses. In case, where a senior citizen is living in his own house, but in need of funds for living expenses, he can borrow a loan by mortgaging his property.

He could have such loan with obligation to repay the principal amount and interest postponed after his death, so that the lender could release the mortgage, if the legal heirs either pay the dues or realise the dues by bringing the property to sale.

If there are lenders for this kind of arrangement, it does help the senior citizens. Such arrangement may be possible, because the lender giving such loan to senior citizens may expect the loan to mature within the normal life expectation of the senior citizen.

Though he does not get annual interest, the principal amount would earn compound interest.

It may be expected that he would advance only such amount with interest, as it would not exceed the value of the property at the time of death of the mortgagor.

It may be expected that the sons and daughters may either want to safeguard the property by giving financial assistance to their parents during their life time to avoid mortgage, or at least, redeem the property by finding funds which they have withheld from the parents during their life time.

It is an interesting proposition, if lenders on such conditions are found in the market. There is an existing practice of such mortgage, but with possession being handed over to the mortgagee till such time the amount is repaid.

But where mortgagor wishes to retain possession, the lenders may not be easy to find, since they have to wait for the death of the mortgagor. Though death is certain, the date of death is uncertain.

As for the tax planning angle, such a person who has to mortgage the property for his living expenses is not likely to have any tax liability, especially in the light of exemption up to Rs. 1,85,000.

Since what he receives is a mere loan, even if he receives it in instalments, it should not be taxable. There would be liability only, if the property is surrendered for an annuity, which is always taxable. For the lender, there is no saving in tax as tax would have to be paid on interest on accrual or cash basis.

This kind of mortgage avoids the necessity of the senior citizen selling his property and, thereby, losing possession of the property during his life time constructed as a shelter for his old age from savings of his life time. It is quite likely that whatever income he is having by way of pension or interest would be losing in value due to inflation making it inadequate for his living, so that reverse mortgage offers a solution for the aged citizens with only a house he lives in. He can continue to live in the house till his demise and if the agreement is so worded, till the demise of himself and his spouse, whichever is later.

S. RAJARATNAM

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