Central Bank of India and Star Union Daiichi Life Insurance have launched a life-long reverse mortgage annuity called CENT Swabhiman Plus. Through this product, a senior citizen can earn a monthly/quarterly /half yearly or annual income as mutually agreed by the borrower and the bank against his/her home. The annuity continues till the individual survives.
This is a changed version of the earlier reverse mortgage scheme, under which the annuity payment would stop in 20 years although the individual could reside in the house till death. But after receiving feedback about insufficiency of a 20-year cap on annuity payments, NHB (National Housing bank) had asked banks and insurance companies to design a product to provide a life-time annuity to senior citizens.
Returns
This product also promises a higher return. Insurers have computed the annuity using mortality charts whereas banks discounted the property value at a specific rate to calculate the payouts. Also, the interest rate on the revised reverse mortgage product offered by the Central bank of India is 9.5%, (subject to reset at the end of two years from the first drawdown) against 12.5% charged on a regular reverse mortgage product, resulting in higher payouts.
There are two variants within this product.
Under the first option, the annuitant receives a life annuity at a constant rate till he survives. In the other, the annuitant will receive annuity for life with return of purchase price on his death. This product is available for senior citizens above 60 years of age.
In case of co-borrowers, at least one of the borrowers should be above 60 and the other should be above 55 years. Also, the owned property should be free from any encumbrances. The bank will lend up to 60-75 % of the value of property.
One of the main advantages of the scheme is it provides a lifetime income stream, which could be used for their financial needs, be it house renovation, medical and other personal purposes.
The borrower can also opt for 25% of the loan amount (maximum amount capped at Rs 15 lakh), which can come in handy in case of contingencies.
However, the bank doesn’t encourage the borrowers to use this money for trading and speculative purposes. The ground has been just set by the state-owned bank for reverse mortgage annuity products in India.
But even as all payments under reverse mortgage loan are exempt from Income Tax under Section 10(43) of the Income-Tax Act, 1961, the monthly or periodic annuity payments are defined as ‘salaries’.
Hence, it is taxable in the hands of the senior citizens under Section 17 of the I-T Act. Any amount received as a loan either in lump sum or installments under such scheme, is also not regarded as income and hence, not liable to income tax.
Also, the bank reserves the right to foreclosure of the annuity if the borrower has not stayed in the property for a continuous period of one year. This could be an issue for a senior citizen if s/he has to move in with his/her son/daughter because of an ailing health or any other reason.
Why go for it:
It provides an income stream to the senior citizen till she/he is alive.
Disadvantage
The annuities are taxable in the hands of senior citizens. Also, the bank reserves the right for foreclosure of the annuity if the borrower has not stayed in the property for a continuous period of one year.
www.daytradingshares.com
