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Clarify on reverse mortgage tax issues
May, 28th 2010

National Housing Bank (NHB) expects the finance ministry to clarify on the tax liability for banks that offer reverse mortgage loans (RMLs).

Under the new model of RML launched last year, banks will pay a lump-sum amount to a life insurance company, which in turn makes annuity-based payment to the borrower. The catch, however, is that the interest payable by the borrower is treated as accrued interest and liable to income tax in the hands of the bank.

This liability on income not yet received is proving to be a dampener for banks to aggressively market RMLs. The RML is a financial product which helps senior citizen/borrower to receive a monthly income akin to pension by monetising their homes. The amount received by the senior citizen/borrower is to be paid back after his death.

There is growing acceptability of RMLs but we are seeking more clarity on the tax-related issues. The proposed Direct Tax Code(DTC) is also silent on this issue, a senior NHB official told Media on the sidelines of a one-day interaction on RMLs.

As per data from NHB, close to 7,029 senior citizens have availed off RMLs of Rs 1,408 crore till March 2010. Besides the tax issue, bankers are also seeking clarity on providing RMLs against inherited properties and rented premises.

Till date, most of the RMLs are on self-acquired properties. Banks want clarity on the title in case of inherited properties. The house is the only underlying asset which is a security and we do not want to be a party in case of litigation between relatives. Similarly, we do not want a situation where the tenant refuses to vacate the house once the RML course through, an official with Punjab National Bank told Media.

As of date, there is only one life insurance company Star Union Dai-ichi Life Insurance, which tied up with a bank Central Bank of India for offering the new RML model. We have signed with 12 customers from places like Guwahati and Chennai. We are looking at tying up with Indian Overseas Bank and Syndicate Bank, said Star Union Dai-ichi Life Insurance managing director and CEO K Sahay.

Till last year, before the RML involving insurance companies was introduced, banks were involved in direct lending to borrowers.

 
 
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