The Hindu Business Line : Reverse mortgage scheme: Pressure on Ministry to finalise tax aspects

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Reverse mortgage scheme: Pressure on Ministry to finalise tax aspects

K.R. Srivats

Prospective users of the product are keen that all taxation issues are addressed upfront soon

New Delhi June 9 Pressure is mounting on the Finance Ministry to look into various aspects of the reverse mortgage scheme and take decisions on tax treatment at the hands of both the borrower and the lender under such a scheme.

With reverse mortgages taking off in a small way in the Indian market, bankers and prospective users of this product are keen that all taxation issues are addressed upfront by the Ministry as a matter of precaution.

Sources said that the Ministry was looking into the taxation aspect and no final view has emerged on the taxation policy on reverse mortgages.

The main contentious issue is whether the recurrent monthly payments received by a senior citizen under a reverse mortgage (equitable mortgage) would be characterised as a capital receipt or income for taxation purpose.

Also, clarity is needed on whether any element of profit embedded in cases where the loan is substantially more than the cost of acquisition of the property should be brought to tax or not.

Tax experts contend that recurrent payments in reverse mortgage are most likely to be treated as `income' if one were to go by the various rulings on annuity payments received from contributions made to superannuation funds. It has been held in various cases that recurrent annuity payments from such funds are in the nature of income.

They added that income characterisation can at best be determined by the terms of the mortgage contract. "If terms of mortgage are such that it does not result in property owner extinguishing his right, then there is no transfer as per income-tax law.

In that case, any receipt will not be regarded as capital receipt. It will then be ordinary income," said an income-tax tax expert.

A reverse mortgage scheme allows a senior citizen, who is the owner of a house, to avail himself of a monthly income against the mortgage of the house while remaining the owner and occupying the house throughout his/her lifetime, without repayment or servicing of the loan.

Extinguishment of the right to the property happens at the end of the 15-year period or at the time of the death of the owner.

In case the property owner survives beyond the 15-year term, he would be allowed to continue to live in the same house but no fresh payments would be made.

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