Tax Liabilities of Reverse Mortgage
Jun 13, 2018 Legal Guidance
Before we go to the tax liabilities of the reverse mortgage, let us first explain what reverse mortgage is. The reverse mortgage scheme (RMS) is the scheme for the senior citizens where they can opt to receive an additional source of income on the security of the owned residential home without having to service it for the lifetime. RMS provides the senior citizens with two options, either receive the lump sum amount of money altogether or receive periodical payment, or they can buy the annuity with the help of lump sum amount of money paid by the lender to the life insurance company.
Though both the option have the tax liabilities which we will be discussing for you here:
Though both the option have the tax liabilities which we will be discussing for you here:
1. Receiving money from the lender:
According to the tax laws, the profits made from the transfer of the capital asset is treated as capital gain and is taxed accordingly. The Section 47 (16) of income tax act, 1961, the act of mortgaging the property for a reverse mortgage cannot be treated as the transfer. Hence, there will not be any tax liability arising at the time of mortgaging the property.
Mortgaging the property will not be treated as a transfer but it will be treated as one when it will be disposed of from the borrower or the lender to the legal heir and it is taxed accordingly. If the property is sold by the lender then the capital gain liability shall not fall on the lender but the borrower or the legal heir to the property.
An important thing to note down is that, if the borrower or the legal heir decides not to sell the property but to pay all the dues with the help of other resources then no tax liability is applicable.
According to the Section 10 (43) of income tax act, 1961, any instalment received from bank whether lump sum of the instalment is fully exempted from tax liabilities. Under RMS there are no tax liabilities for the property until it is disposed of.
Mortgaging the property will not be treated as a transfer but it will be treated as one when it will be disposed of from the borrower or the lender to the legal heir and it is taxed accordingly. If the property is sold by the lender then the capital gain liability shall not fall on the lender but the borrower or the legal heir to the property.
An important thing to note down is that, if the borrower or the legal heir decides not to sell the property but to pay all the dues with the help of other resources then no tax liability is applicable.
According to the Section 10 (43) of income tax act, 1961, any instalment received from bank whether lump sum of the instalment is fully exempted from tax liabilities. Under RMS there are no tax liabilities for the property until it is disposed of.
2. Receiving the annuity from the life insurance company:
Instead of receiving the direct payments from the bank, the borrower can ask the lender to pay the entire lump sum amount to the life insurance which company. The life insurance company, in turn, will agree to pay the borrower the periodic money which is treated as an annuity. The tenure and amount of annuity depend on the borrower. The borrower can choose it for the life which is more than the period of 20 years.
In this case, the loan is provided by the lender to the borrower but it is handed over to the life insurance company. The transfer of the money is not treated as the transfer of capital gains. However, the tax liability for the same is different.
According to the tax law, any annuity received is taxable under the head, ‘income from other sources’. In 2013, some amendments were made in RMS to provide for the payment of the lump sum payment due to life insurance companies under the scheme. However, no amendments have been made for the same under Section 10 (43) to make the receipt of annuity exempt from the taxes.
It is clear from the tax laws that the option of receiving the direct payments from the lender is more tax efficient than taking the annuity from the life insurance companies. However, with an annuity, you can receive payment for the life which isn’t the option in the direct payments.
In this case, the loan is provided by the lender to the borrower but it is handed over to the life insurance company. The transfer of the money is not treated as the transfer of capital gains. However, the tax liability for the same is different.
According to the tax law, any annuity received is taxable under the head, ‘income from other sources’. In 2013, some amendments were made in RMS to provide for the payment of the lump sum payment due to life insurance companies under the scheme. However, no amendments have been made for the same under Section 10 (43) to make the receipt of annuity exempt from the taxes.
It is clear from the tax laws that the option of receiving the direct payments from the lender is more tax efficient than taking the annuity from the life insurance companies. However, with an annuity, you can receive payment for the life which isn’t the option in the direct payments.
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