With the government still unclear about the final tax treatment of the periodic payments received by the borrower under a reverse mortgage scheme, many banking companies and especially the senior citizens (users for the product) are in a state of dilemma. The tax aspects of a product constitute an indispensable factor in judging its viability.
Since reverse mortgage is a new concept introduced in India only by Budget 2007, it is yet to be decided whether the periodic or lumpsum amount received by the mortgagor would constitute a loan or an income. If it is considered as loan (capital receipt), no tax liability would arise, while treating as income would attract tax.
Going by the trend in various developed nations such as US and Canada where reverse mortgage product is popular, the payments received are considered as loan and hence are tax free. But payment of property taxes and insurance is the liability of the borrower since he remains the owner of the house.
In our opinion, the Indian government should also follow suit, otherwise taxes would take away a major part of the income of the borrowers. Moreover, since the product is targeted at senior citizens, there has to be an element of relief for them.