No tax for senior citizens on annuity earned through reverse mortgage

As Moneylife Foundation and several other NGOs have been demanding, the government has agreed to give a tax break to senior citizens on income earned through the reverse mortgage scheme

The government has given a big boost to reverse mortgage (RM) products by making annuity earned by senior citizens on RM loans tax-free. In another important development, it has removed the 20 year annuity payment restriction and made it lifetime for a borrower.  This vindicates the stand taken by Moneylife about giving tax breaks to senior citizens on annuities and will now allow seniors, who may have substantial assets in the form of a house, to draw down its value and increase their disposable income in times of galloping inflation, by opting for reverse mortgage. 

 

What exactly is an RM? Reverse mortgage allows senior citizens who have a house to draw down the value of that asset in the form of a monthly payment, while continuing to live in the same house until the demise of the borrower and his/her spouse. This is the exact opposite of a regular mortgage for buying a house. 

 

In 2011, Moneylife Foundation had submitted a position paper to the government titled "Financial Issues Faced by Senior Citizens" which had said that there should be no tax on the annuity derived by the way of reverse mortgage loan for senior citizens. The position paper was prepared following a brainstorming session led by Dr SA Dave (former chairman of SEBI, UTI and the committee on pension reforms) and several non-governmental organisations (NGOs) working for senior citizens.

 

According to media reports, RV Verma, chairman and managing director of National Housing Bank (NHB) said that it has been decided that annuity would be exempted from tax.

 

The position paper sent by Moneylife Foundation to the government had said, "One would expect that the absence of a social security system that pays a lifetime income stream, combined with low coverage of formal company schemes, would lead to a high demand among people approaching retirement for annuity products. On the contrary, the demand for annuities in India has been negligible. The annuity industry has not been able to penetrate the insurance market, or for that matter the psyche of the Indian customer. The Indian annuity industry is characterised by low rates of participation from the public, a small number of providers, limited product innovation, low returns and taxes. It is indeed unfortunate that annuities are taxed. Eliminating taxes on annuities is bound to make them more attractive".

 

Thanks to unattractive tax treatment and the fact that it requires two agencies, a bank and an insurance company to take on the financial risks, RM as a product has not been very popular. 

 

A few schemes have been offered by NHB and housing finance companies along with banks and insurance companies, but these too are not marketed in a big way. Besides income tax benefit, the installment income or annuity is expected to increase at least three times to the benefit of retired person, the NHB chief said.

 

According to a conservative estimate, the reverse mortgage loan market is upwards of Rs20,000 crore. Banks have so far sanctioned Rs1,800 crore and disbursed Rs800 crore under reverse mortgage loan since its launch in 2008.

 

The revised scheme enables a person above the age of 60 years to avail of monthly payments from insurance company as annuity till the life time against the mortgage of his/her house while remaining the owner and occupying the house.

 

According to a notification issued by Central Board of Direct Taxes (CBDT), the period for reverse mortgage loan is extended to 'the residual life time of the borrower' from 20 years. Earlier, the period of reverse mortgage loan was 20 years from the date of signing the agreement by the reverse mortgagor and the approved lending institution.

 

As per the amendment, Life Insurance Corporation of India (LIC) and other insurer registered with the Insurance Regulatory and Development Authority (IRDA) have also been included as annuity sourcing institutions.

 

As per the scheme, on the borrower's death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property. The borrower or heir can also repay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.

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COMMENTS

Balwant Jain

6 years ago

It seems the author has not read the amendment and the income tax provisions together properly. As per Section 10(43) of the Income Tax Act, what is exempt is amount of loan received loan under reverse mortgage scheme. The Section 10(43) reads as under:
"10[(43) any amount received by an individual as a loan, either in lump sum or in instalment, in a transaction of reverse mortgage referred to in
clause (xvi) of section 47."
Section 47(xvi) specifies the transaction which are not regarded as transfer for capital gains purpose. The Gazette notification no. SO 3034(E) dated 7th October does not amend the provisions of Section 10(43) so the question of annuity becoming exempt by virtue of this notification does not arise. Would request the author to read the provisions carefully to arrive at such conclusion.
What this notification has done is that is has allowed the banks to give the amount of the reverse mortgage to the insurance company and extend the loan tenure in respect of such loans to residue life of the borrower in case he has opted for annuity.
May be the intention is to exempt the annuity from tax but a thorough reading of this notification does not translate the intention into effect.

TIHARwale

6 years ago

Reverse mortgage would only be suitable for someone who does not have legal heirs. till now big house owners let portions on rent and survive on rental income but in flats this is not possible
The biggest drawback of a reverse mortgage is that on the death of the owner and his/her spouse, the bank gives an option to the legal heirs - either settle the overall loan dues and retain the house or the bank will sell the house, use the proceeds to settle the loan and give the balance to the legal heirs. In many cases, the legal heirs might be unable to settle the loan dues and could lose the property.
"Instead of going for reverse mortgage, in case you move to a less-expensive house, you can save more and keep the asset for your next generation. Let's say you have a property worth Rs 1 crore. you sell your property and buy new property, which is less expensive, say Rs 50 lakh, and invest the proceeds in an option which gives you regular monthly income.

REPLY

Ravi

In Reply to TIHARwale 6 years ago

However these days you may have to shell out almost the entire proceeds by sale of your current home in order to buy/build even a smaller version! It would seriously pose economical challenge as also since many owners have attachments to their homes this factor has to be taken into account. My wish is that if the interest to be charged is not exorbitant it is worth a try.

arun adalja

6 years ago

i think this scheme is not very popular in india as amount is given for monthly expenses is very low and here agreement is done with 30 to 40% of market value so loan amout comes law anyway i may be wrong.views are welcome.

Ravi

6 years ago

When you say "borrower" I presume it includes the spouse too? If an old couple took the RM, logically only after both spouses die the property is auctioned. is that right?
Also Insurers like LIC who I understand are also to be roped in, should insure the payment of mortgage with a portion of the annuity so that after demise the heirs get to continue the mortgage or the loan gets adjusted. Another query is whether the interest on such mortgage would be some astronomical figure like for buying a car etc with rates galloping each month/year? Clarity is lacking in information provided.

Moneylife IMPACT: I-T dept asks officials to use official email IDs

Income Tax officials that were seeking tax details on their Gmail and Yahoo! email IDs would henceforth use only official email IDs for official communication

The Income-Tax (I-T) department has directed all of its officials to use official email IDs for all official communication. Moneylife had raised the issue of I-T officials sending mails to taxpayers using IDs from free email service providers like Gmail and Yahoo!.

 

In a circular, issued on 27 September 2013, the Directorate of I-T, has said, "Since official IDs are available with most of the Departmental Officers, it is instructed that hereinafter all official communication(s) on mail shall be only through the official email IDs detailed above. In the event that an official email is required to be sent urgently and the official email ID not available, the official IDs of the Commissioners of I-T (CsI-T) or Directors of I-T (DsI-T) may be utilised for the same.”

 

As Moneylife pointed out one of the I-T officers sent a reminder to a wealthy individual to pay his advance tax in time and send details to his Gmail email address.

 

Here is the circular issued by the I-T department...
 

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COMMENTS

SKRISHNAN

4 years ago

Some little known facts about Service Tax:
According to provisional figures the Service Tax Collection during 2013-14 was Rs.1, 54,780crores. It was observed that actual collection of Service Tax fell short of the budget estimates by 14.08% during FY 14. Further while the collection against the arrears of Rs. 20,361 crores at the beginning of the F.Y 13, was Rs.2,332 crores (11.4%) the collection against the arrears of Rs. 39,557 crores during F.Y.14, was only Rs.1232 crores (3.12%) indicating that while the arrears had increased considerably the recovery rate had fallen drastically. It is however important to note that in almost all cases of arrears, the Service Tax would already have been collected by the Service Provider from the Service Receiver!-Source: CAG's Report
S.Krishnan

SKRISHNAN

4 years ago

Who is interested in the Bhavishyavani of "√ĄCHE DHIN ARAHE HEN". Let us ask in Kishore's melodious voice "Kal khya hoga kisne jana"
We however see and hear everyday what is happening today. It was all right for Omar Khayyam to say "Unborn tomorrow and dead yesterday,why fret about them, if today be sweet! If today is not sweet we have necessarily to bemoan what happened yesterday and worry about what more is going to happen tomorrow and the day after and so on. So let us solve today's problem first before we think of the faraway ache dhin! Don't let us be led away by the"brave music of a distant drum"!
S.KRISHNAN

TIHARwale

6 years ago

why only Income Tax Dept officials, all Govt and Public Sector officials should use authorised e mails only and additionally all Depts should display the mail ID of helpline of the organisation who in turn should provide email ID of specific Depts within the organisation ( because most of the organisation web sites don't display the mail administrators mail ID so that their assistance can be sought, also Deptartmental ID is needed in addition to individual ID so that if Individual is not in seat , nails will still go to Dept Heads so that contents of messages are followed up. It is also seen Dist Courts don't have mail IDs of Dist Judges to whose notice shortfalls in functioning of sub ordinate courts can be brought on record for remedial action. Just have more clarity see the web site of Election Commission of India or Central Vigilance Commission one will see how informative is their site.

Builders must pay VAT on under construction flats says Supreme Court

The Supreme Court upheld the Bombay High Court’s verdict that asked builders to pay 5% value added tax -VAT for under construction flats sold during 20 June 2006 to 31 March 2010.

The Supreme Court had ruled that value added tax (VAT) cannot be imposed on buyers and builders, developers have to pay the tax (5%) for under construction flats sold during 20 June 2006 to 31 March 2010. The apex court also clarified that VAT is not payable, if a fully constructed flat is sold to the buyer and builders will be liable to pay tax only on cost of construction.
 

However, there are chances that builder will recover these charges from buyers by adding it in costs and it will only create litigations between builders and buyers.
 

Earlier, citing a circular issued by the Maharashtra Sales Tax Department, builders were asking flat buyers to pay the additional money before 31 October 2012 for their homes bought between 2006 and 2010. However, several consumer organizations like the Grahak Panchayat had maintained that it is the builder, developer who will have to pay VAT and not flat buyers.
 

The Supreme Court order will have a direct impact on realtors from Karnataka, Maharashtra and Uttar Pradesh. The order also empowers all state government to issue circulars to levy VAT. Maharashtra government had issued a circular in 2006, and subsequently in 2007 levied a VAT of 5% on sale of flats.
 

The Supreme Court had clubbed 14 appeals from Karnataka and 12 from Maharashtra. Verdict means that developers in states such as Maharashtra, Uttar Pradesh and Karnataka, where VAT has been levied on such transactions will have to pay the charges. Builders were trying to recover this amount from the buyers.
 

Although, the state governments and even High Court has said that developers have to pay VAT, several were reluctant to pay the tax.
 

Advocate General for Maharashtra clearly stated, “Implementation of Rule 58(1-A ) of Maharashtra VAT shall not result in double taxation and in any case all claims of alleged double taxation will be determined in the process of assessment of each individual case." As builders have already paid taxes for raw materials and this may create issues of double taxation. However MVAT rule 58 (1-A) provides deduction of expenses on labour and service charges for the execution of the work related to the goods that has already been transferred.
 

Earlier, builders’ association CREDAI had approached the apex court after the Bombay High Court rejected their plea to impose only 1% VAT. In 2006, the state government imposed a VAT of 5% on constructions made between 2006 and 2010. The move resulted in an additional tax liability on flats, shops and bungalows sold by developers between 20 June 2006, and 31 March 2010.
 

To know more about VAT read, VAT on sale of under-construction flats in Maharashtra: All you need to know

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COMMENTS

Gaurav Goyal

4 years ago

purchased flat in oct 13 of rs 4100000 including service tax, paid 600000 as booking amount enterted into aggrement for apply of loan, loan sanctioned in a month paid rs 1200000 as part payment ,after three mont another payment of rs 500000 after two month rs 500000 part payment total 2800000 has been paid now the bulder offer final payment and includes 5% vat on 41 lac who has to pay and on what amount.

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