Reverse mortgage: Tax breaks for seniors on the house

NEW DELHI: If your parents are considering a reverse mortgage, here is a festival bonanza. The government has made the return from mortgaging their house to earn a monthly income more attractive. Now, the annuity income from a reverse-mortgage loan will become tax-free. The government has also scrapped the restriction of a 20-year annuity payment and said it would be applicable as long as the owner lives.

Several senior citizens have availed of the scheme, launched in 2009, to support them in their old age. Under a reverse mortgage loan, a senior citizen of 60 years taps the value of his residential house, while enjoying the security of using the same as his residence until either the mortgagee or his/her spouse survives.

The government has also allowed insurance companies to participate in the scheme. This is set to increase the annuity income three-fold from the present level on the same value of a reverse mortgage loan and usher in competition in this segment.

For example, a senior citizen has a house, the market value of which is Rs 1.25 crore. He or she can avail of a reverse mortgage loan of Rs 1 crore on the house. Only 80% of the value of the house is allowed as reverse mortgage loan. But, the entire amount is not handed out in one go. Of the total amount, a house owner can take 50% of the loan amount or Rs 15 lakh, whichever is lower, as a lump sum payout. The rest comes as annuity.

So, the owner who has availed of a Rs 1-crore reverse mortgage, is eligible for Rs 15 lakh as a one-time payment and the remaining Rs 85 lakh would be invested in annuity.

The amount of annuity depends from bank to bank and is calculated on the basis of the period for which the beneficiary wants to receive the annuity. For an average 10-year period, the annuity is Rs 420 per month for every Rs 1 lakh of reverse mortgage loan and for 20 years it is about Rs 100 per month for every Rs 1 lakh reverse mortgage value. There is no benchmark so far fixed for life-long annuity.

The Rs 85 lakh that the house owner has received would be invested in annuity and he will get an annuity of Rs 35,700 per month for 10 years and Rs 8,500 for 20 years. Now, after the National Housing Bank's (NHB) intervention, this amount would be trebled.

Until now, only banks were allowed to participate in the scheme. The entry of insurance companies, is expected to stir up the sector. NHB chairman R V Verma said the changes in the tax treatment for annuity will help large-ticket reverse mortgage loans for a shorter tenure.