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The Direct Taxes Code Bill, 2009 is silent on the tax treatment of reverse mortgage. The author opines that having regard to the nature of the transaction, the position which prevails under the Income-tax Act, 1961 will continue under the Code also. However, it is desirable that express provisions be incorporated.
1. Under section 47(xvi) of the Income-tax Act , 1961 (“the Act”), any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government is not regarded as a ‘transfer’. Consequently, the amount received by an individual as a loan, either in lump sum or in instalment, in a transaction of reverse mortgage as above is exempt from tax under section 10(43) of the Act.
2. The Direct Taxes Code Bill, 2009 (‘the Code’) is silent on the tax treatment of reverse mortgages. As the Code is silent on reverse mortgage, a question arises what will be its tax implications under the Code?
3. There is no definition of ‘reverse mortgage’ either under the Act or under the Code. The reverse mortgage is so-called because the payment stream is reversed. Instead of the borrower making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the borrower. While a reverse mortgage loan is outstanding, the borrower owns the home and holds title to it, without having to make any monthly mortgage payments.
There is no transfer of title in property by the borrower to the lender when he mortgages property to the lender. The borrower remains the owner with right to redeem the property by repayment of dues. He has a right to continue living in the house till death. Non-repayment of amounts received with interest will not invite action from lender. The Explanatory Memorandum to the Finance Bill, 2008 notes that “in the context of a reverse mortgage, the intention is to secure a stream of cash flow against the mortgage of a residential house and not to alienate the property”. To the same effect para 15.3 of CBDT’s Circular No.1/2009 dated March 27, 2009. Therefore, amount received on reverse mortgage will not attract capital gains tax in the financial year in which the amount is received. The transfer/alienation of property occurs “at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.” Therefore, taxable capital gains will arise in the year in which the mortgaged property is alienated by the mortgagee for recovering the loan.
4. Having regard to the nature of the transaction, it appears that the above position which prevails under the Act will continue under the Code also. However, it is desirable that express provisions be incorporated.
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