Reverse mortgage for senior citizens

Loans | admin | January 6, 2011 at 6:55 pm

loan for senior citizens Post retirement, Sanjay Sharma was struggling to meet his regular expenses, especially due to the rising cost of living and healthcare. As there was no close family to take care of his growing expenses, he decided to sell his house — his only saving — and move to an old-age home. Since I knew how attached he was to his house, I introduced him to reverse mortgage scheme, which is offered by leading Indian banks and is popular in developed countries. Under the scheme, he can mortgage his house and receive a regular cash flow from the bank during his lifetime, without worrying about repayment.

Mr Sharma immediately rushed to a nearby bank and gathered the following details and enthusiastically, shared it with me: The minimum age for availing this scheme is 60 years. Married couples are also eligible as joint borrowers, provided one of them is above 60 years and other is not below 55 years of age. The borrower should be the owner of the house, which has at least 20 years of residual life.

The borrower may mortgage the house to a lender and receive periodic payments (monthly, quarterly, etc) during his/her lifetime. The periodic payout depends on the value of the property and the term of the agreement. Maximum monthly payments are capped at Rs 50,000. Lump-sum payments are allowed, subject to medical exigencies, which is restricted to 50% of the total eligible amount of loan, up to a maximum of Rs 15 lakh.

The borrower is not required to service the loan during his lifetime. In case the borrower dies or leaves the house permanently, the loan is repaid along with accumulated interest through sale of the house. The balance surplus (if any) is paid back to the borrower/ his nominees. The borrower or his heir can also repay or prepay the loan with accumulated interest and have the mortgage released.

The transaction of reverse mortgage also enjoys favourable tax treatment, under the Income Tax Act, 1961 (Act). Transfer of a house, under the scheme, does not attract capital gains tax. Further, any amount received as a loan, either in lump sum or installments, under the scheme, is not regarded as income, and hence, will not be taxed as income tax. However, the borrower (or the legal representatives) is liable to pay capital gains tax at the point of alienation of the mortgaged property by the mortgagee, for the purposes of recovering the loan.

Similar tax provisions have also been incorporated under the Direct Taxes Code reverse mortgage for senior citizens Bill, 2010. However, the scheme has, so far, failed to attract senior citizens primarily due to lack of awareness and their reluctance to part with their houses. Even the lure of higher monthly lifelong payments has failed to generate interest in the scheme. It is necessary for the government and the banking institutions to educate the senior citizens and organise public awareness programs to highlight the benefits of the scheme.