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Reverse mortgage made more attractive
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Will an income-tax concession spur public interest further in this relatively novel facility?
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With Union Finance Minister P. Chidambaram stating that money accruing from reverse mortgage will be exempt from income tax, there can be a fresh surge of interest in a relatively new instrument in India assuring steady incomes and financial security for senior citizens.
Reverse mortgage is a facility through which a senior citizen turns the equity in his residence into cash which he or she receives on a regular monthly basis (or even in lumpsum, in some cases). The house is pledged to the bank or (it may be possible also with a non-banking financial institution) which fixes up the instalments of payments and the interest.
The money is recovered by the bank only when the person dies or he or she shifts out of the pledged residence permanently. The preferred mode of recovery is through legal heirs who may pay up the bank dues. The other means is to sell the property. The sale proceeds in excess of the dues are given to the legal heirs.
This is a major source of succour for senior citizens in countries such as the U.S., and it can well catch up in India now that nuclear families are on the ascend.
Psychological security
There is an opinion that it is merely a psychological security in the Indian scenario where children by and large take care of their parents.
A senior official of a public sector bank says that there have been several enquiries about the instrument but hardly any takers. Several of the bank’s customers have made enquiries about the facility since it was introduced a year ago, but no one had so far come forward to benefit from it, says the bank official.
An official of another public sector bank says the enquiries have come in large numbers and the responses have been positive. According to him, reverse mortgage will catch up in the Indian market.
The State Bank of India and Punjab National Bank were among the banks in the country to reach the market with reverse mortgage products, widely seen by market analysts as having immense potential for the Indian market.
The importance of financial products that provide security and income for senior citizens is of particular importance in countries such as India where the social security network or pension funds are extremely limited. It is a product well suited to Indian conditions, says George E. George of Kerala Builders’ Forum.
It is ideally suited to the middle class when a residential property will ultimately be the only savings one will have on retirement. And with nothing left in liquid cash, reverse mortgage can provide the much-needed liquidity, Mr. George says.
He has welcomed the move by the Finance Minister to exempt income from reverse mortgage from the purview of income tax. In India, reverse mortgage products can be more successful than in the U.S.
Although a couple of banks introduced the scheme last year, uncertainties about income from the scheme coming within the income-tax purview had prevented people from taking advantage of it. Now that the clarifications have been made on the income-tax front, it is set to catch on in the Indian market.
And, the Finance Minister has decided to make the clarification at a time when the government’s policies have made it amply clear that it is squeezed for cash to provide liberal social security and financial security for senior citizens.
K.A. MARTIN
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