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Reverse mortgage: legal heirs liable for capital gains

Operational guidelines specifically provide that the equity of the borrower at no time will exceed the loan amount so that the loan amount may not exceed the net realisable value of the property. Such a non-recourse guarantee has to be furnished to the lending institution by the borrower as a covenant in the loan agreement. It follows that if realisable value on revaluation falls short of the loan amount, further disbursements beyond realisable value will be stopped. This is required to be clarified more clearly.

Since it is likely that the property may stand in the name of one spouse, while the surviving spouse may not be the owner, a Will in favour of the surviving spouse is also a required document as per operational guidelines. The borrower will have to undertake that he will continue to use the property during his lifetime as his primary residence. This condition will apply to the other spouse as well, where he or she is covered.

One would expect that the period of loan would be the life of the borrower/s. Strangely, the period of loan is specified as not exceeding 20 years both in the operational guidelines and in the Reverse Mortgage Scheme, 2008. This raises a question as to the fate of the senior citizen, if he survives the period of 20 years. The scheme notified by the Central Government as Reverse Mortgage Scheme is silent on this matter. Operational guidelines provide that the borrower will continue to use the residential property as his or her primary residence as long as he is alive or permanently moves out of the property or ceases to use the same as primary residence. If the equity of the borrower becomes negative during the period beyond 20 years, would the senior citizen’s right to residence be jeopardised?

If so, the reverse mortgage loan will not serve the purpose. Presumably, it should be a risk borne by the lending institution or covered by it by way of insurance. This is a matter which requires clarification. In fact, it is necessary that there should be provision enabling extension of benefit of continued payment, if revaluation of the property justifies such continuation of the benefit treating it as a fresh loan and not merely the right of residence. At any rate, it should not be possible for the lending institution to bring the property to sale depriving the borrower of the right of occupation during the lifetime of the borrower or the surviving spouse.

Sec. 10(43) has been inserted by the Finance Act, 2008, with effect from assessment year 2008-09 to exempt any loan received by an individual, whether in lumpsum or instalments in a transaction of reverse mortgage, if it conforms to the scheme notified by the Central Government. Similarly Sec. 47(xvi) exempts capital gains from transfer of any capital asset in a transaction under the scheme.

The proceeds of a loan, whether advanced by lumpsum or periodically, are even otherwise, not taxable. These provisions may only indicate the interest of the Government in encouraging the Reverse Mortgage Scheme.

It may be pointed out that the legal heirs or legatees may well be liable for capital gains in respect of any amount receivable on the sale of the property, if the loan is not settled by them on the demise of the senior citizen.

The scheme notified by the Government provides for the following information to be required by the lending institutions before sanctioning of the loan. (i) Name and address of the owner of the capital asset; (ii) Permanent Account Number of the owner of the capital asset; (iii) total area, including built-up or covered area, of the capital asset; (iv) cost of acquisition and the year of acquisition of the capital asset; (v) cost of improvement and the year of improvement of the capital asset; (vi) name, address and Permanent Account Number of all the legal heirs to the estate of the owner of the mortgaged capital asset and (vii) a copy of the registered Will of the owner of the capital asset, including an undertaking to inform any changes made therein during the currency of the loan. It follows that an applicant should make a Will and has it registered before making the application.

The above information is more relevant for ascertaining capital gains on the sale of the property, if the loan is not settled by the legatees named in the Will so that these requirements are obviously intended solely to protect the interest of revenue by having all the necessary information for computation of capital gains as and when liability arises.

(Concluded)

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