The Hindu Business Line : Reverse mortgage sans reverses

The Finance Minister, Mr P. Chidambaram, has made good his budget speech promise to senior citizens. The National Housing Bank has come up with draft norms for reverse mortgage, an idea whose time the Finance Minister seems to think has come in India as well. Briefly, reverse mortgage enables a senior citizen sitting on a hot property to unlock its innate illiquid potential into a series of monthly or quarterly or even a lumpsum payment without any obligation to the lending financial institution during his lifetime. His/her inheritors would however have to pick up the tab, including the accrued interest lest the lending financial institution sells the property to settle the dues thus piled up by the senior citizen. Conceptually, reverse mortgage is a welfare measure reaching out to senior citizens who are either neglected by their wards or are too self-respecting to depend on them for financial support and sustenance.

The imponderables

There are quite a few imponderables though. First, what would be the income-tax treatment of the series of annuities or the lumpsum received? Are they indeed annuities? The senior citizens could contend that whatever the periodicity of payments received, they are essentially loans, and by no stretch of imagination is a loan one's income. Indeed this is the sum and substance of the concept — reverse mortgage is an unconventional loan handed out over a considerable period of time in small instalments with its repayment being billed for after the death of the borrower or at the end of the mortgage period, whichever is earlier.

That the lending institution has recourse to sale in the event of disinterest in the responsibility to repay on the part of the legal heirs abundantly proves the point that the transaction is basically that of a loan.

However to stave of disputes, the income-tax law should say so in so many words. While the issue would certainly be judicially tested, there is a case law that throws some light on it. In Travancore Sugars and Chemicals Ltd v. CIT (1966) 62 ITR 566, the Apex court held that where purchaser of a running business agrees to pay a percentage of profits to the vendor without any limit and for an indefinite period and such payments have no relationship to any capital sum, they are revenue, and not capital, expenditure.

Applying the rationale of this judgment to payments received from lending institutions on reverse mortgage, it is clear that what is received is definitely relatable to a capital sum — the value of the house property — and it is definitely limited to such value and confined to the period of mortgage. Therefore, the series of payments received is in fact a capital receipt outside the pale of taxation. That it is received gratis without any liability to repay is beside the point.

Second, under Section 6 of the Hindu Succession Act, 1956, one acquires interest in a family property through survivorship.

In other words, normally it is not possible for the Karta of the family property to alienate the interests of the survivors or survivors-to-be. It should, therefore, be made clear as a measure of abundant caution that only self-acquired properties as opposed to joint family properties can be reverse mortgaged.

Filial dispute

Lastly, it must be made sure that the idea of reverse mortgage, welcome as it is, does not have the unintended effect of setting siblings on a collision course on the sombre occasion of death of the borrower. To be sure, the lending institution would give the sibling(s) time to settle the dues piled up by the deceased. It would, however, be unreasonable to expect the institution to be patient beyond a point. And this could be the flashpoint for filial dispute.

Suppose there are four children and the widow having equal share in the intestate self-acquired property of the deceased and let us assume that only the first son has the resources to pay. Would he be deemed to have acquired the property to the exclusion of the other legal claimants? Or, would the first son be deemed to be holding the property in trust till such time the other claimants pay their share of the debt inflicted by their father? Would the poor mother, with no resources, be denied the share of the property because she is unable to pay off? All these issues must be thought through and provided for lest the measure introduced with fanfare proves to be hasty.

(The author is a New Delhi-based chartered accountant.)

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