What Is a Reverse Mortgage Loan and How It Helps Senior Citizens Save Tax?

Reverse Mortgage Loan: Senior citizens who own a house can now borrow money through a reverse mortgage loan without worrying about paying taxes on it. The best part is, they don’t even have to pay capital gains tax when they give their house to a bank under this scheme. That’s because the government has made it clear that such a transfer will not be counted as a sale. Even the money they get from this loan will not be taxed under any other income head. This tax relief is part of the Income Tax Act under sections 47(xvi) and 10(43).

What is Reverse mortgage?

A reverse mortgage loan works in a simple way. Just like a normal loan, the house stays in the name of the owner, and the house is used as security. But here the person who takes the loan doesn’t have to pay anything monthly. Instead, the bank gives money either in a lump sum, monthly payments, or both.

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This helps retired people manage their expenses without selling their house. But the money they borrow will keep increasing every month because of interest and charges. That means, over time, the loan amount grows, and the home equity becomes smaller.

Reverse Mortgage Loan: Who can get it?

To get this loan:

• the main borrower must be at least 60 years old.
• If the loan is taken with a spouse, some banks may ask the spouse to be at least 58. This requirement can be different from one bank to another. For example, SBI asks for the spouse to be more than 58.
• When the person who took the loan dies, the bank takes steps to get back the money it gave. The bank may sell the house to recover the full loan amount and interest.
• If some money is left after that, it will go to the legal heirs. But if the heirs want to keep the house, they have to pay the full loan amount with interest to the bank.

This is not always easy because the interest on reverse mortgage loans is quite high. SBI, for example, charges 10.55% on such loans, while its normal home loan starts at just 7.5% if you have a good credit score.

banks don’t give loans for the full value of the house. Usually, they offer only around 80% of the property’s worth. SBI gives up to ₹2 crore in big cities like Mumbai, NCR, Pune, Chennai, Ahmedabad, Bengaluru, and Hyderabad. In other places, the maximum loan is ₹1.5 crore.

How much loan one gets also depends on the location, age, and condition of the house. Homes in high-demand areas usually get higher valuation, while others may not fetch as much.

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This is Not for Everyone

Senior citizens who take this loan can keep living in their house until they pass away or move out. They don’t have to make any payments during their lifetime, but the loan tenure is usually only 10 to 15 years, depending on their age when the loan starts. That means if someone lives longer than the loan period, things might get tricky.

This option may not work well for people who want to leave their house for their children. That’s because the children will have to repay the full loan and interest to keep the house. And with interest rates being so high, that may not be easy.