Reverse Mortgage in India

The reverse mortgage scheme offered by some of  the leading banks in India could bring the required answers to the suffering senior citizens who are without proper financial support . The rising cost of living, healthcare, other amenities compound the problem significantly. No regular incomes, a dwindling capacity to work and earn livelihood at this age can make life miserable. A constant inflow of income, without any work would be an ideal solution, which can put an end to all such sufferings.

 Most of the people in the senior age groups, either by inheritance or by virtue of building assets have properties in names, but they were not able to convert it into instant and regular income stream due to its illiquid nature. The Union Budget 2007-2008 had a great proposal which introduced the ‘Reverse Mortgage' scheme.The reverse mortgage scheme offered by some of  the leading banks in India could bring the required answers to the suffering senior citizens.

What is Reverse Mortgage Scheme?

Reverse Mortgage is a product which is like a ray of hope for some senior citizens who don’t have access to any regular income. The concept of Reverse Mortgage is simple, a senior citizen who owns a house but has no regular source of income can mortgage his property with a bank or housing finance company (HFC) and in return they will pay the individual a regular payment.

What are the features of this loan?

The draft guidelines of reverse mortgage in India prepared by the Reserve Bank of India  have the following features:

• Any house owner over 60 years of age is eligible for a reverse mortgage.
• The maximum loan is up to 60 per cent of the value of the residential property.
• The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company).
• The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
• The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.
• The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
• Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

How is the loan paid?

With a reverse home mortgage, no payments are made during the life of the borrower(s). Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time.

In most areas where appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.

When the last borrower passes, or it is decided to sell the home and move, the loan becomes due. The ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries.

The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remaining equity of the home.

What happens after the death of one or both of the spouses?

If one of the spouses dies, the other can still continue living in the house. If both die, the bank will give their heirs two options -- settle the overall outstanding loan and retain the house, or the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs.

How much of an annuity income can my house generate using reverse mortgage?

The banks have so far not indicated the interest rates. However, we can safely assume that it will not exceed the interest rates used for loan against property -- which is currently in the region of 12 per cent to 14 per cent.

What is a loan to value ratio?

Loan to value ratio means the percentage of loan that you will get for the value of the property that you pledge. The typical rate loan to value ratio is 60 per cent.

So, for e.g., if you pledge a property worth Rs 60 lakh (Rs 6 million), then the loan amount that you can get is Rs 36 lakh (Rs 3.6 million).

Does a person's age affect the amount of annuity paid?

It certainly does. Higher the age, higher the annuity! Everything else remains the same.

Why is this scheme not popular?

Recent reports seem to indicate that a very small percentage of senior citizens only seem to have taken advantage of the facility since its inception. This could be perhaps because better awareness had not been created about the product.

Secondly, the Indian banking industry caps the available loan amount at Rs 50 lakhs  instead of providing for an equitable percentage of the property's value, and limits the loan period to a tenure of 15 years.

The product is still evolving and may take on new dimensions depending on how the banks wish to present its consumer appeal.
(Source :http://www.rediff.com/money/2009/mar/06perfin-all-about-reverse-mortgage.htm)

Though there are certain advantages reverse mortgage loans to Senior citizens there are certain disadvantages also. 

*Disadvantages of a reverse mortgage loan:

• Although reverse mortgage loan can act as a source of survival during old age it can always be called a last resort. It has few demerits which have to be noted before planning for a reverse mortgage loan.
• Pledge the property to loan lender means officially giving loan provider the right to sell the house to recover the loan. If the owner of a house is willing to transfer the ownership to someone after his/her death then this loan is not to be considered as a source of income.
• High rate of interest compared to other loans.
• Variation in interest rates and loan amount during the time of valuation can turn into serious problems at times. 

The terms and conditions of the reverse mortgage loan are to be studied and taken care of before purchasing it. Everything from factors related to title of property, valuation of property, lending limits should be considered before choosing a particular mortgage loan.

(* Source:http://tips.thinkrupee.com/articles/what-is-reverse-mortgage.php)

The details of Reverse Mortgage Loans offered by different banks are given in the following links:

Links for details of Reverse Mortgage in different  Banks/Institutions

•   Indian Bank
•   State Bank of India
•   Punjab National Bank
•   Bank of Baroda
•   Central Bank of India
•   Union Bank of India
•   LlC Housing Finance
•   Andhra Bank
•   Corporation Bank
•   Canara Bank
•    Allahabad Bank

Tax Free Incomes in India

While submitting your Income Tax returns you need not include the following incomes since they are are tax free in India.

1 Agriculture Income

Agriculture income is exempt under the Indian Income Tax Act. This means that income earned from agricultural operations is not taxed. Agriculture operation includes processing & sale of agricultural crops from agriculture land. Even rent received from agriculture land is not taxable.

2. Dividend Income

Any dividend received by investment in stocks or mutual funds is tax free in the hands of investors.

3. Saving Bank Interest incomeThe interest earned on Savings Bank accounts up to a limit of Rs. 10,000/- is exempt from inclusion in Gross Total Income for the purpose of Income Tax.

4. Income for being partner in firm

If you received any income for being partner of firm which has already been assessed, than this income share does not required inclusion for calculation of tax. This is called as profit sharing as per partnership deed.

5. Travel Concession or Assistance

Money received from employer as LTA for the purpose of travel to any place in India along with family for the purpose of leave is exempted from tax.
The amount exempt under this clause shall in no case exceed the amount of expenses actually incurred for the purpose of such travel. This claim can be made two times in bunch of 4 years.

6. Money received as Gift

If you receive gift amount less than 50,000 Rs/- from anyone it will be considered as tax free amount.
Another good thing is gifts received from specified relatives are exempt from Income Tax, and there is no upper limit also.

7. Rent Received

Any allowance received by employer to an employee to meet expenditure actually incurred on the payment of rent for accommodation is tax free. This is called as HRA this amount is taxable if house is owned by the employee or he has not incurred the rental.

8. Income from Long term Capital Gain

Any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund are tax free in nature. These transactions are subject to securities transaction tax.

9. Income from Life insurance policyMaturity amount received as benefit from a life insurance policy, including bonus payment, is tax free.

10. Income from government securities

Any earnings from interest, premium on redemption or other payment on securities, bonds, annuity certificates, savings certificates and other instruments issued by the central government is tax free.

11. Scholarship money

Scholarships granted to meet the cost of education is tax free in nature.

12. Awards and RewardsAll payments receive in cash or kind as an award given by the central or state governments or by a body recognized by the central government is tax free.

13. Retrenchment


In unfortunate event of company closure compensation received by workman is considered as tax free.

14. Relief funds

Any amounts which are received by an individual as part of the Prime Minister’s National Relief Fund or students fund or foundation for communal harmony will be treated as tax free.

15. Retirement / Gratuity

Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be tax free subject to following limits


For every completed year of service or part thereof, gratuity shall be paid at the rate of fifteen days wages based on the rate of wages last drawn by the concerned employee.



16. Commutation of Pension

In case of employees of Central & State Govt., Local Authority, Defense Services and corporations established under Central or State Acts, the entire commuted value of pension is exempt.

In case of any other employee, if the employee receives gratuity, the commuted value of 1/3 of the pension is exempt, otherwise, the commuted value of ½ of the pension is exempt.

17. Leave Encashment

Any cash amount received as compensation for earned leave which is enchased at the time of retirement is tax free. This is applicable only to employees of central/state government.


In case of other employees, the exemption is to be limited to a maximum of 10 months of leave encashment, based on last 10 months average salary. This is further subject to a limit of Rs. 3,00,000/-.

18. Voluntary Retirement

Payment received by an employee at the time of voluntary retirement, or termination of service is exempt from the tax subject to extent of Rs. 5 Lakh.

But, the company paying the VRS should have a framework for VRS as prescribed by the government.

19. Provident Fund

Any payment received from a Statutory Provident Fund, (i.e. to which the Provident Fund Act, 1925 applies) is tax free.

20. Superannuation

Payment from an Approved Superannuation Fund will be tax free provided the payment is made at retirement, incapacitation or at death of employee.

(Source: http://www.staffcorner.com/view.html?id=195001 )

Basic Savings Bank Deposit Account

The central bank had introduced 'no-frills' accounts in 2005 to provide basic banking facilities to poor and promote financial inclusion**. The accounts could be maintained without or with very low minimum balance.

Reserve Bank of India as per  Circular dated 10.8.2012 asked banks to drop the 'no-frills' tag from the basic saving accounts as the nomenclature has become a stigma.

It has asked the banks to provide zero balance facility in the basic banking accounts along with ATM-cum-debit cards without any extra charge.

The details of the circular are given below:

1.Banks were advised in November 2005 to make available a basic banking 'no-frills' account either with 'nil' or very low minimum balance as well as charges that would make such accounts accessible to vast sections of population. 

With a view to doing away with the stigma associated with the nomenclature ‘no-frills’ account and making the basic banking facilities available in a more uniform manner across banking system, it has been decided to modify the guidelines on opening of basic banking ‘no-frills’ accounts. 

Accordingly, in supersession of instructions contained in circular DBOD.No.Leg.BC. 44/09.07.005/2005-06 dated November 11, 2005 on Financial Inclusion, banks are advised to offer a ‘Basic Savings Bank Deposit Account’ which will offer following minimum common facilities to all their customers:

i. The ‘Basic Savings Bank Deposit Account’ should be considered a normal banking service available to all.

ii. This account shall not have the requirement of any minimum balance.

iii. The services available in the account will include deposit and withdrawal of cash at bank branch as well as ATMs; receipt/credit of money through electronic payment channels or by means of deposit/collection of cheques drawn by Central/State Government agencies and departments;

iv. While there will be no limit on the number of deposits that can be made in a month, account holders will be allowed a maximum of four withdrawals in a month, including ATM withdrawals; and

v. Facility of ATM card or ATM-cum-Debit Card;

3. Banks would be free to evolve other requirements including pricing structure for additional value-added services beyond the stipulated basic minimum services on reasonable and transparent basis and applied in a non-discriminatory manner.

4. The ‘Basic Savings Bank Deposit Account’ would be subject to RBI instructions on Know Your Customer (KYC) / Anti-Money Laundering (AML) for opening of bank accounts issued from time to time. If such account is opened on the basis of simplified KYC norms, the account would additionally be treated as a ‘Small Account’ and would be subject to conditions stipulated for such accounts as indicated in paragraph 2.7 of Master Circular DBOD. AML. BC. No. 11/14.01.001/2012-13 dated July 02, 2012 on ‘KYC norms/AML standards/Combating of Financing of Terrorism (CFT) /Obligation of banks under PMLA, 2002’.

5. Holders of ‘Basic Savings Bank Deposit Account’ will not be eligible for opening any other savings bank deposit account in that bank. 

If a customer has any other existing savings bank deposit account in that bank, he/she will be required to close it within 30 days from the date of opening a ‘Basic Savings Bank Deposit Account’.

6. The existing basic banking ‘no-frills’ accounts should be converted to ‘Basic Savings Bank Deposit Account’ as per the instructions contained in para 1 above.

Source:http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7501&Mode=0

** Financial inclusion is the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost in a fair and transparent manner by mainstream institutional players. 

Financial inclusion has become one of the most critical aspects in the context of inclusive growth and development.