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Longevity has its share of perks too!
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Reverse mortgage facility attracts neither income tax nor capital gains tax, writes K.SUKUMARAN
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Sunset years: Senior citizens are likely to acquire houses in the days to come for safety and security.
A few banks have suddenly come up with either revised or fresh schemes after the 2008-09 Union Budget, which exempted the loan amounts obtained under reverse mortgage from payment of income tax and capital gains tax. Let us have a look at the origin of the reverse mortgage scheme and its present position.
Senior citizens are likely to become an important section of the population in acquiring houses in the days to come, if not already so, for reasons of security and stability.
This fresh demand has its germination in the 2007-08 budget proposals presented by Finance Minister P. Chidambaram and approved by Parliament.
Loan facility
As per the statement of the Finance Minister, reverse mortgage was intended to provide a loan from any commercial bank against property to meet the monthly running expenses of senior citizens.
The term denotes the facility of receiving periodical payments from the lender against a limit fixed against the security of house owned by the borrower and living therein, instead of the person taking a loan paying back the debt (EMI).
The National Housing Bank was entrusted with the task of formulating the scheme which was put in place subsequently.
Age factor
The salient features of the scheme are:
• Those above 60 years of age eligible to obtain the loan. Joint loans are also allowed wherein one applicant should be above 60 years.
• The applicant should own a house which should be occupied by him or her.
• The loan will be released in monthly instalments. Lump sums may also be released from the loan sanctioned, to meet expenses for medical treatment, the amount being directly paid to the hospital where treatment is taken. Lump sum release is also permitted for home improvement.
• The loan should not exceed 60 per cent of the value of the house.
• The loan need not be repaid. The bank may recover the dues either after the death of the borrower or when the borrower leaves the house once for all. Surplus after adjusting the dues will be paid to the successors of the borrower.
• The loan may be for a maximum period of 15 years.
• Concessional rate of interest may be charged, which may be reset every five years.
Some grey areas
The most important grey area was lack of clarity about applicability of tax on the loan.
The twin problems posed were: a) whether the amount of loan be treated as income; and b) whether the transaction be treated as a transfer of property attracting capital gains tax.
Since there was no clarification on the issues either from the Government or the Central Board of Direct Taxes, many intending borrowers did not go for the facility until recently. In view of the same problems, many banks too refrained from formulating the scheme.
Clarification
The 2008-09 budget put an end to the controversy and clarified that no tax is applicable to the transactions under reverse mortgage. The Government categorically said that the loan under the scheme is not an income attracting income tax and again, the deal is not a property transaction attracting capital gains tax. Capital gains is applied only when the borrower dies or he is unable to repay the loan, forcing the lender to sell the property.
In the aftermath of these clarifications, it is expected that there will be a substantial demand for such loans, though still there is no clarity as to how the interest earned or accrued need to be treated.
In view of the clarification, some banks have come up with the reverse mortgage facility during the last few weeks.
Some of them lay down minimum and maximum loan amounts. Some banks have also fixed the maximum age limit at 75 years though this may prove a wet blanket in popularising the scheme.
The proposal is innovative and need to be applauded. It is further expected to push up the demand for purchase of houses by both senior citizens and middle aged persons, especially those who have no pensionable job. However, it may not be advisable to leave the fate of that vulnerable section of society to banks when criticisms against banks are increasing on the strong arm tactics they adopt for recovery of loans.
If independent arbitrators are available to settle disputes in these areas expeditiously without much legal tangle, the position will be more transparent and justice would seem to have been done.
If a law similar to the one existing in some western countries to make bankers liable for handling the finances of senior citizens is enacted, it may make the banks accountable in implementing the scheme.
Benefits
Considering the increasing number of elders in our country due to longevity of life as a result of better living conditions and availability of medical facilities, house sellers will have a safer target group if elder-friendly houses are built at affordable prices. Hope the real estate promoters are listening.
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