Reverse mortgage loan: What is it? Can senior citizens get a capital gains tax exemption?

Yes, senior citizens can get tax exemption on the amount received through a reverse mortgage scheme notified by the Central Government. Moreover, they are also not required to pay capital gains tax by transferring the property for a reverse mortgage loan.

"The transfer of a residential house property by way of a reverse mortgage as per the Reverse Mortgage Scheme made and notified by the Central Government for senior citizens, is not liable to be taxed as Capital Gain," the Income Tax Department says.

"Even the loan amount received is not taxable under any other head of income," it adds.

The tax freedom to senior citizens on reverse mortgage loans is provided under sections 47 (xvi) and 10(43) of the Income Tax Act, 1961.

What is a reverse mortgage loan?

A reverse mortgage loan allows senior citizens to use their homes as collateral to get a loan to fund their financial needs in retirement.

This type of loan may be suitable for senior citizens who own a self-acquired home in India but do not have regular income to support themselves.

• First, the homeowner (senior citizen) pledges his/her home to a bank or housing finance company.

• Second, the lender provides money to the senior citizen borrower/borrowers, in case of a living spouse. This can be either as a lump sum or a series of regular payouts, or both.

To be eligible for a reverse mortgage loan, the age of a single borrower should be 60 years. However, in the case of joint borrowers, there is also an age limit for the spouse. For instance, in SBI, the age limit of the spouse in case of a joint loan is more than 58 years. This may vary from one bank to another.

What happens to the property?

The bank or lender recovers the loan amount when the senior citizen passes away. It can sell the house to recover both the loan principal and interest. And, if any money is left, then it may be passed on to the borrower's heirs.

Alternatively, the borrower's heirs may repay the full loan and the interest to the lender and keep the house.

Not for everyone

The senior citizens availing the reverse mortgage loan are allowed to live in the house for as long as they and their spouses live. They are not required to service the loan during their lifetime. However, it might get tricky as the tenure of a reverse mortgage loan is generally 10-15 years, depending on the age of the borrower.

The reverse mortgage loan may not be suitable for someone who wants to leave a legacy for their heirs in the form of their house.

The heirs will need to fully repay the loan and interest to the bank to keep the house. But this will not be easy, as the interest rate on a reverse mortgage loan is higher than a normal home loan.

For instance, SBI is currently offering this loan at 10.55%, whereas its home loans are starting at just 7.5% for borrowers with high credit scores.

Generally, lenders offer only up to 80% of the property's value as a reverse mortgage loan. The loan amount is also not above ₹1-2 crore. For example, SBI offers up to ₹2 crore as a loan against properties located in municipal corporation areas of NCR, Mumbai, Pune, Chennai, Ahmedabad, Bengaluru, and Hyderabad. At other centres, the bank provides up to ₹1.5 crore as a reverse mortgage loan.

The valuation of the house also depends on various factors, such as the property's age, location, and condition. The bank will generally pay less if it is not situated in a high-demand area.