Reverse Mortgage: Key to Secure Golden Years

 

Source: EconomicTimes.com

 

Change is the only constant. So is the change in the social fabric of our society. With the rise in nuclear family system, especially in larger cities, more and more senior citizens are facing emotional, psychological and financial issues.

Further, with the advancement of technology and developments in the medical field, the average life span of an individual is on the rise. Considering the relatively inadequate social security regime in India, the question that needs to be addressed is how to generate a regular cash flow for senior citizens to supplement their pension/other income and address their financial needs.

Regular cash flow

In this context,reverse mortgage scheme helps senior citizens to address their financial requirements to a great extent. Under the reverse mortgage scheme, senior citizens can unlock the value of their house by mortgaging the same with a financial institution like bank etc, and enjoy regular payments during the contract period. Continue to stay in the same house.

Another key attraction of this scheme is that senior citizens can continue to stay in their mortgaged house, as per the terms and conditions of the contract.

Reverse mortgage: How it works

The basic concept of reverse mortgage seeks to provide immediate liquidity against the house as an asset. The scheme requires a senior citizen to mortgage his/her house property to the financial institution, which in turn makes periodic payments to the senior citizen during his lifetime/period of contract.

Under this scheme, the senior citizen is not required to service the loan during his lifetime/period of contract and therefore, does not have to worry about the monthly repayments of principal and interest amount to the financial institution.

On the death of the senior citizen, or on the senior citizen disposing the house property, the loan is repaid along with accumulated interest, through sale of the house property. The senior citizen/their legal heir(s) can also repay or prepay the loan along with accumulated interest to release the mortgage without opting to sell the property.

The value of the property is generally revisited periodically. If the valuation has increased, the senior citizen is given an option to increase the loan, and should he/she exercise this option, then the incremental amount is accordingly taken into consideration.

No capital gains on mortgage

Under the provisions of the Income-Tax Act, 1961 (the Act), any transfer of capital asset in a transaction of reverse mortgage under a scheme made and notified by the Centre is not regarded as a transfer and hence, does not attract capital gains tax.

Regular payments not taxable

Any amount received as a loan either in lump sum or installments under such scheme, is also not regarded as income and hence, not liable to income tax.

Scheme yet to gain popularity in India

The scheme of reverse mortgage is quite common in developed countries. It is, however, still not very popular in the Indian context. Few reasons could be the emotional attachment with the house to pass it on to the next generation, lack of awareness about the scheme and the beneficial tax provisions, lack of effective marketing by the financial institutions, etc.

In any case, this scheme is likely to become popular over time and more and more senior citizens will be able to take advantage of the benefits under this scheme and meet their financial requirements in their old age.

 

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