Reverse Mortgage Scheme under Income Tax

Taxation
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April 30, 2021

A reverse mortgage scheme is a scheme under which the borrower mortgages his house property to the bank (i.e. lender). The bank makes periodic/lump sum payment during the borrower’s lifetime. The borrower is not required to refund any amount received from the bank (i.e. lender).

This scheme is for those above the age of 60 years; it facilitates senior citizens. The bank recovers the loan through the sale of the property after the borrower’s death. The heirs of the borrower can also repay the loan with interest and have the mortgaged property released.

Condition of reverse mortgage scheme
Reserve Bank of India introduced this scheme in 2007, and the Reserve Bank of India (RBI) has set some conditions related to reverse mortgage schemes. Following are the requirements of the reverse mortgage scheme:

This scheme can be availed by house owners whose age is 60 year and above. When applying for a loan jointly with a spouse, one has to be aged 60 years or above.
The house being mortgaged should be free from any obstructions. Also, only residential properties can be mortgaged under this reverse mortgage scheme.
The minimum period of the loan is 10 years, with a maximum term of 15 years. However, banks (i.e. lender) do allow terms of up to 20 years.
The maximum period of reverse mortgage scheme are as under:

S.No.	Mode of disbursement	Maximum period of loan
1.	Where the loan is disbursed directly to the reverse mortgage	Twenty years from the date of signing of the agreement of reverse mortgage scheme by the reverse mortgagor and the approved lending institution (i.e. lender).
2.	Where the loan is disbursed, in whole or in part, to the annuity sourcing institution (such as Life Insurance Corporation of India) for periodic payments by way of annuity to the reverse mortgage	The residual lifetime of the borrower

After the period of the loan, the payments from the lender will cease. However, the owners can continue to stay at the property till the death or moving out permanently.
A fixed interest rate is applicable to reverse mortgage schemes. It is not covered under the floating rate yet.
After the death of the property owners or if they move out, the loan becomes payable. If the legal heirs would like to control the property, they would need to repay the predetermined amount of loan to the bank (i.e. lender).
The bank (i.e. lender) will dispose of the property after the death of the owners. If the sale amount is higher than the amount of the loan, the amount in excess will be handed over to the heirs of the property.
There is no permanent condition towards the use of payments given by the banks (i.e. lenders).

Tax treatment
As per section 47 (xvi) of the Income tax Act 1961, any transfer of a capital asset in a reverse mortgage transaction under a scheme made and notified by the central government.

Section 10(43) any amount received as a loan, either in a lump sum or in installment in a reverse mortgage transaction, is exempt from tax, i.e. not be treated as income of the senior citizen. However, the loan is a capital receipt and to promote the scheme; income has been exempted.

This scheme can provide needy senior citizens to create a regular source of income. The negative side declares that the receipts are lesser than the interest charged, and senior citizens gradually want funds, so the reverse mortgage is a laudable scheme. A reverse mortgage is more of debt by its nature and the most costly form of credit due to the demand’s high-interest rate. Therefore, a reverse mortgage scheme is a good scheme for a person aged 60 or above to get a monthly flow of income.

At AJSH, we assist our clients with various income tax compliances, including income tax assessments, TDS returns, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about the reverse mortgage scheme, kindly contact us.