India’s NHB Requests Reverse Mortgage Proceeds to be Tax Free

201003161817.jpg The Financial Chronicle is reporting that The National Housing Bank (NHB) is planning to seek tax exemption for its new reverse mortgage loan-enabled annuity (RMLEA) schemes from the finance ministry, a top official said.

The NHB, the regulator for housing finance companies is also asking state governments to sponsor insurance schemes to expand RMLEA schemes to people who are covered under the government’s housing projects.

The RMLEA was launched in December 2009 and while it was an improvement over the orginal product it has yet to catch on. “This product will not go without an insurer,” said Sridhar, who is the chairman and managing director of the Central Bank of India said his bank was the first to launch the product with Star Union Daichi Life Insurance.

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To increase the penetration of the new scheme, NHB has invited more bankers to join the initiative along with an insurance partner, said Sridhar. “To give boost to penetration, the government should exempt annuity payments to the customer from income tax,” said Sridhar.

The state governments should come forward to cover the risk by sponsoring an insurance scheme, he added.

NHB to seek tax exemption on reverse mortgage scheme

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  • While proceeds at the time of receipt are generally not taxable on U.S. reverse mortgages, forgiveness (i.e., cancellation of indebtedness) of any portion of the proceeds could result in taxable gain to the borrower. It is far more likely in the case of note payoff acceleration due to the death of the last surviving borrower that heirs would be taxed on any such forgiveness. It is my opinion that because the note is nonrecourse, FHA insurance has absolutely no impact on the taxable nature of the transaction.

    It would have been nice if NRMLA had been around in 1989 to fight for the nontaxability of all proceeds but since it was not formed until a decade later, it is too bad the MBA did not take up our cause back then.

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