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Reverse mortgage: No clarity on tax liability

By Vishal Dutta in Mumbai/Ahmedabad
August 03, 2007 13:26 IST
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National Housing Bank, the refinancing and regulatory authority of housing finance companies in India, is of the opinion that the newly-coined financial product "reverse mortgage" would fall under the tax bracket unless the government clarifies on exempting reverse mortgage from taxation.

S Sridhar, chairman and managing director of NHB, told Business Standard, there is a flaw under the present reverse mortgage draft, as there is no clarity on the taxation aspect of the reverse mortgage."

He further informed that the senior citizens as well as the housing finance companies will be liable to taxation on the reverse mortgage products unless the government clarified the taxation of reverse mortgage.

Under the present situation, he said, "The amount received by senior citizens every month are not income but the payment of the value of the house that he/she had mortgaged, thereby it attracts tax."

Reverse mortgage, also called equity release scheme, allows senior citizens to take a loan against a house in installments after retirement. The lender recovers the money by selling the house after the borrower dies.

Sridhar informed that the NHB had approached the authorities at the Centre on the issue of exempting reverse mortgage from taxation as it is the senior citizens who benefit, apart from developing reverse mortgage as commercial product.

Unless, government gives some clarification on the taxation aspect of reverse mortgage by exempting it, the product will attract tax liability, informs Sridhar.

According to Sridhar, the reverse mortgage products in USA are popular and the government had exempted it from tax as it was meant to help the senior citizens with a regular flow of funds to sustain them during old age.

However, in India, the concept is newly coined by NHB and it is yet to gain ground amongst the housing financing companies and in public.

Apart from the reverse mortgage, NHB also plans to set up a mortgage guarantee company as a JV with international partners to provide risk cover to lenders against defaults.

"We are negotiating with international companies to set up a mortgage guarantee company jointly," adds Sridhar. The initial capital will be of Rs 100 crore (Rs 1 billion) and that would go up to Rs 300 crore (Rs 3 billion) in later stages.

NHB will have majority stake in the new company but would refrain from having 51 percent stake as legal implication would turn the new company as a government subsidiary.

"We will have less then 51 percent stake but will be the majority stake holder in the new company," informs Sridhar. NHB plans to run the new company as a private company and once the concept of "mortgage guarantee company" gains ground in the market, NHB would withdraw from the company.

To maintain the majority stake, NHB will have two to three partners in the new company. One of the partners is the Asian Development Bank with whom NHB is in talks.

On the issue of providing housing to poor in the country, Sridhar said, the role of NHB in the first phase was to provide refinancing and regulating the housing financing companies in India, which is more or less over as the housing financing company had grown better and performing well.

"Now, NHB is entering into second phase where it would focus it resources on providing housing to un-served and under-served people in the country", said Sridhar.

As per an estimate, there are 24.7 million people in urban and 7 million people in rural areas without housing facility. The slums had increased in urban areas. "We are focusing to (on) develop (ing) solutions for cheaper technology for house building, to solve the problem of shortage of land."

NHB had approached CEPT for developing technology for lowering the cost of housing. NHB also wants to encourage private and public partnership to fill the gap of housing shortage for the poor.

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Vishal Dutta in Mumbai/Ahmedabad
Source: source

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