As mentioned in an English daily, house rich and cash poor is a predicament that many elderly face in India today. Hence, regular source of income of such persons needs augmentation to enable them to live a reasonable comfortable life. It is reported that the National Housing Bank (NHB) is working out a scheme, under which senior citizens can avail loans against their high priced houses with no obligation to return the loans during their lifetime. They would also be permitted to live in the houses mortgaged till either of the spouses is alive.

How the scheme works

In the scheme, being conceptualised, a senior citizen of 62 years or more, who owns a house, can be given loan up to a fixed amount worked out on the percentage basis of the market value of the house owned and given on mortgage. They can, if they so desire, opt for receiving the amount in monthly instalments also. In such a case, the amount admissible will be spread over in 15 years in the form of annuity namely as monthly or annual payments. Tentatively, as worked out in an English daily, the scheme can be implemented in the following manner in regard to a house of the value of Rs 1crore.

The loan amounts and the monthly instalments are expected to vary with the age of the owner because the chances of older borrowers to survive for longer periods are less than the borrowers, who are in lesser age group. This will lead to a reduction of the interest portion of the loan.

There can be variations in the flat scheme suggested earlier. A borrower can take lump sum amounts (with reduction in the amount of instalments) for emergencies like medical treatment, marriage in the family, education of children/grand-children, etc. However, the loan amount will not be given for making investments. The scheme is also expected to have a provision for revaluation of the property after a period of five years, on the basis of which, there could be revaluation of the loan/instalment amounts.

In the scheme proposed by NHB, the spouses will be the joint borrowers. In the event of the death of the owner, the spouse will be entitled to continue to live in the house and get monthly payment (if so opted) till he/she continues to live. If a borrower survives beyond 15 years, he would stop getting monthly payments, but will continue to live in the house till he dies. The maintenance of the house will be the responsibility of the house-owner. The loan would become due and payable only when the last surviving owner dies. The settlement of loan disbursed, along-with accumulated interest (expected to be @10% pa) will be met from proceeds by the sale of the house. If the heirs of the borrowers so decide, they can keep the property after paying the amount of the loan and interest due. If the borrower desires to settle the loan before 15 years, he can also do so in the same manner.

Tax implications

The first issue, in cases where option for payment in instalments is preferred (Choice-2 above), the monthly instalments received can be treated as income. Obviously, the amount received would be payment of loan amount in instalments and hence, cannot constitute income.

However, if the total payments received on account of Choice-1 and Choice-2 are compared, more amounts would be received under Choice-2. This can be illustrated with the following figures concerning age group 71-72 (supra) This can be taken to represent interest and can be subjected to tax after deduction of interest @10%, which the borrower is expected to pay on the loan amount.

The second issue would relate to capital gains. No liability for capital gains would arise when the property is mortgaged, because a mortgagee is not considered as ‘transfer’ within the meaning of this term as given in section 2(47) of the Income Tax Act, 1961 (Act). This question would arise when the property is finally sold. At that time, the amount of capital gain or loss can be computed in accordance with the provisions of section 48 of the Act after taking into account the cost inflation index for consideration in the hands of the borrower or his heirs, as the case may be.