Reverse Mortgage Loan Blog

The report that payouts to senior citizens under reverse mortgages will not be liable to tax as they will be treated as loans rather than as income should go far to ease worries among senior citizens about old age income security.

For all the talk of ‘demographic dividend’ from a young population, the absolute numbers of those over 60 years of age is also increasing and old-age security is a serious issue. Only a minuscule section of the population (essentially bureaucrats and employees of some public sector undertakings) has access to pension.

Consequently, any move that buttresses old-age security is welcome. With the joint-family structure breaking down and nuclear families increasingly the norm rather than the exception, senior citizens are often left to fend for themselves in their old age. As longevity increases, thanks to advances in medicine, what this means that they have to provide for many years after retirement when they are no longer in a position to earn any income even as their health expenses mount.

Reverse mortgages (under which the owner of a house mortgages it to a lender in return for a steady stream of income) are an innovative way of transforming unproductive assets into productive assets. By freeing up the capital locked up in self-occupied residential property (without the hassle of selling it outright), it empowers senior citizens and enhances their economic independence.

If the payments received are treated as income (which they could well be) they would be liable to tax and to that extent the sop, reduced. It is, therefore, good that the government has decided to be magnanimous and treat all reverse mortgage payouts as loans. Ideally, the decision should be followed by a formal notification to this effect so that we have policy clarity on the matter.

The cost, by way of revenue foregone, is unlikely to be significant while the benefits by way of reducing old-age distress are likely to be large. Especially since reverse mortgages are likely to be entered into only by those who really need to supplement their income, as most Indian parents would still like to pass on unencumbered property to their children. In such a scenario, it’s a small sop and must be given graciously.

Found here.

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