Reverse Mortgage in India & Its Tax Implications

The concept of “Reverse Mortgage” is quite popular in countries like Australia, Canada & United States, whereas it has been recently introduced in India and is gaining popularity these days, as it gives a sense of financial security to the senior citizen who own a house property, but lacks a regular source of income.

The scheme of “Reverse Mortgage” seeks to monetize the house as an asset and a senior citizen who owns a house property can mortgage his property with a bank for regular periodic payments i.e. the bank will make regular periodic payments to the senior citizen during his lifetime, in the form of a loan and the senior citizen is not required to pay back the principal amount and the interest amount to the bank during his lifetime. Consequent to the death of the borrower senior citizen or on leaving the house property permanently, the bank will sell the house to recover the principal and the interest amount. Also, the borrower senior citizen or his legal heirs (In case of death) can repay the loan amount with accumulated interest and have the mortgage released on the house property.

In the interest of senior citizen, the government of India has exempted the above transaction from income tax. In order to exempt the above transaction from capital gain tax, transfer of capital asset under the scheme of reverse mortgage has been excluded from the definition of the term “Transfer” by inserting a new clause (xvi) in Section 47 of the Income Tax Act, 1961, which lists certain transactions which are not to be regarded as transfer. The newly inserted clause is as follows:

“(xvi) any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the central government.”

Consequent to the introduction of the above-mentioned clause, a transfer of capital asset under the scheme of reverse mortgage made and notified by the central government shall not attract capital gain tax. Though the receipts in the form periodic payments from the bank as loan under such scheme of reverse mortgage are in the nature of a capital receipts, however in order to provide certainty in the tax regime to the senior citizen, a sub-section 43 has been introduced under Section 10 of the Income Tax Act, 1961, which lists incomes exempt from tax. The new inserted sub-section is as follows:

 “any amount received by an individual as a loan, either in lump sum or in installment, in a transaction of reverse mortgage referred to in clause (xvi) of Section 47 is exempt from tax.”

Consequent to the above two amendments, a senior citizen, under a reverse mortgage scheme, will be liable to income tax(on capital gains) only at the point of alienation of the mortgaged property by the mortgage bank for the purpose of recovering the loan.

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