Finance Minister P. Chidambaram presents Union Budget 2008 in Parliament.MUMBAI (Hindustan Times),
March 1, 2008:
While presenting the Union Budget 2008, the Finance Minister has shown his concern towards senior citizens. The threshold limit for exemption from tax for senior citizen is proposed to be increased from Rs. 1,95,000 to Rs. 2,25,000.
The Finance Minister has cleared the ambiguity on the tax treatments of Reverse Mortgage transactions, a new concept of financing prevalent in western countries. With the advancement in life savings technologies and better life style, average age expectancy of people in India has been increasing. Due to unprecedented rising cost of living and medical treatment, old age people find it difficult in the later half of their lives to meet these expenses, in the absence of heirs' support.
In such cases, Reverse mortgage is quite helpful. In the Reverse Mortgage, person mortgages his house in favour of bank and bank pays him monthly instalment for the lifetime as per the agreement. On the death of mortgagor, the spouse of the deceased can live in the said house upto his/her lifetime.
On the death of mortgagor and his/her spouse, bank sales the house and recovers the payments made to the mortgager along with interest from the sale proceeds. The surplus amount, if any, is paid to the legal heir. If the legal heir wishes to retain the possession of the house with him, he has to repay the outstanding loan amount along with interest to the bank.
While presenting the Union Budget 2007-08, the Finance Minister had announced that National Housing Bank will introduce a reverse mortgage scheme for senior citizens. Some of the banks have already formulated the scheme. However, certain tax issues were not resolved. The Finance Minister has proposed to resolve those issues.
The mortgage of property, in certain cases, is a transfer liable to capital gain tax. In the case of reverse mortgage, the intention of the mortgagor is to secure cash flow against the mortgage of a residential house and not to alienate the property. Hence, it is now proposed to exempt from capital gain tax the transfer under notified reverse mortgage scheme. The loan received in lump sum or in instalments under a reverse mortgage scheme will be exempt from income tax.
Under the reverse mortgage scheme, the capital gain tax liability will arise in the hands of the borrower only at the time of alienation of the mortgaged property by the bank for the purpose of recovering the loan. If the legal heir pays the dues to bank, there will not be any capital gain tax liability.
As per the proposed amendment, the assessee will get additional deduction upto a sum of Rs. 20,000 for mediclaim insurance premium paid for the health of his parents, who are senior citizens. The previous condition of dependent parent has been dispensed with, which is a welcome step.
The author is Partner-Direct Taxes, Haribhakti Group
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