For all those looking forward to a regular income through a reverse mortgage scheme post-retirement, there may be a dampener in the form of income tax. Uncertainty hangs over the stream of payments that borrowers receive as the Central Board of Direct Taxes (CBDT) is yet to clarify whether the payments should be treated as loan or income.
A reverse mortgage allows individuals to receive money in the form of regular payments as long as they live by pledging their homes to housing finance companies. The loans are repaid from sale proceeds.
After the finance minister announced the scheme in the recent budget, housing finance regulator National Housing Bank (NHB) released operational guidelines for the scheme last week. Many players, including banks, have shown keen interest in this new scheme even before the final guidelines were released.
However, a lack of clarification from the CBDT is expected to take the sheen off the scheme, if tax authorities take away a big sum out from their proceeds. In a reverse mortgage, the lender makes periodic payments, including lump sum payments, to the borrower. The payment stream flows from the housing finance company to the borrower which is the reverse of a conventional mortgage. The loan is often a percentage of the value of the property, depending on the age of the borrower. Unlike a conventional loan, the payment could be lump sum or made periodically or some tranches of committed line of credit which is mutually agreed by the borrower and the lender. In many countries, the payment received in return of execution of a reverse mortgage is considered as a `loan and not `income from the tax angle. However, in India, the tax authorities have still not come clear on the tax treatment.
As a result, many senior citizens are apprehensive about opting for reverse mortgages, according to sources.
Often, tax implications of proposals announced in a budget are clarified within the period that the budget is passed in Parliament. However, it has not happened in this case. This could also be because the operational guidelines for the scheme have just come out. According to a section of the market, there could be some tricky situation arising out of the structure of the scheme, which could be of disadvantage to the tax authorities.
For example, as per the reverse mortgage scheme, while the borrower gets the money against the asset he currently owns during his life time. There could be cases when the lender gets the money by selling the house only after the death of the borrower. However, as per the current tax law, a capital gains tax needs to be paid on deals over Rs 50 lakh.
And the onus of this payment is on the owner of the house. But, since the sale would happen only after the death of the owner, recovery of taxes would be difficult on property sale under such circumstances. But on the other hand, if the payment through reverse mortgage is treated as income, a chunk of the money will go away as taxes with very little left for the borrower.