Reverse mortgage is the loan given to senior citizens who posses a self-occupied property. As per the reverse mortgage the senior citizens (borrowers) can mortgage their house to the bank (lender). The bank in turn gives a lump sum amount or pays periodic installments to the borrower. This product enables the borrower to get a regular source of income while they continue to stay in their house.

In spite of being a very useful product for retirement planning it has not picked up in our country, the reason being as of last year the tax treatment on reverse mortgage was unclear. In the Union Budget 2008-2009, the Finance Minister P. Chidambaram explained the tax treatment on reverse mortgage.

As per Budget 2008-2009 the reverse mortgage will not amount to a transfer. This means that mortgaging of the property by the senior citizens to the bank will not be considered as transfer of an asset and therefore it will not attract any capital gains tax.

Secondly, the stream of revenue received by the senior citizen will not be income. This implies that the lump sum amount or the amount received in installments by the senior citizens for mortgaging the house to the lender is not taxed as income.

However in case the senior citizen or his/her legal heir (s) want to repay, the loan amount will not be eligible for tax deduction on the interest repaid and will have to pay capital gains tax on the sale of the property.

Reverse mortgage can prove to be very helpful for those senior citizens who do not have any source of income and do not plan to leave behind an estate for their legal heirs.

A personal loan can be taken for any use like financing wedding expenses, medical expenses, trips, renovation or construction of the house, etc. But a personal loan cannot be taken for speculative purposes. However the lenders are not concerned with the use of the loan and no guarantors or security or collateral is required.

Does the personal loan qualify for tax deduction benefits? The principal repaid does not qualify for tax deduction benefits. However, under Section 24 of the Income Tax Act, the interest paid for a personal loan taken for acquisition, construction and renovation of the house can be claimed for tax deduction up to Rs. 1.5 lakh. The borrower can claim tax benefits only after the construction is completed and possessing the property.

While claiming deduction the borrowers may need to show the certificate of completion of construction of house property. If this is not available then the proof of occupation by a certain date such as electricity bills, telephone bills etc. can also serve as a good proof of completion and occupation.

Thus you can fulfill your dreams by taking a personal loan and also claim tax deduction benefits.

Is life insurance necessary, considering the fact that one has to pay premiums regularly? May be not that important now, but will be a great help in future. Insurance is often mistaken as an investment product. It is a product which gives protection benefit. On buying a life insurance policy you feel that your life is secured. It helps you when you need the financial support during crisis. While parking our surplus funds for retirement we only consider those products which give returns at regular intervals. Most of the times we forget to insure our life.

Is life insurance needed for women? A woman needs to be monetarily independent, as she has to manage her career, bring up her family, and take care of her aging parents. A woman who is the single parent taking care of her children must be insured. In her absence her child will not be financially deprived. A working woman who financially supports the family must also be insured. The insurance policy will help to fill the financial gap in her absence. And a home maker must be insured as her services are priceless.

However, not many women are insured. There are only two companies in India which offer life insurance policies for women. The two companies are Bajaj Allianz Life Insurance Co. Ltd. and Life Insurance Corporation of India. Bajaj Allianz Life Insurance Co. Ltd. offers two different policies for women - Bajaj Allianz House Wives and Bajaj Allianz Working Women where as LIC offers Jeevan Bharathi.

Both these policies are designed specially for women. Bajaj Allianz Life Insurance Co. Ltd. covers Critical Illness Benefit, Reconstructive Surgery Benefit for Breast (s) due to Breast Cancer, Congenital Disability Benefit and Complications of Pregnancy Benefit. LIC of India covers Female Critical Illness Benefit and Congenital Disability Benefit.

Another advantage that women get is they have to pay low premium on life cover as compared to men as the mortality rate is higher in the former.

Women in India must insure their life as tomorrow is uncertain. Insurance helps to live a carefree life.

What is a teaser loan? A teaser loan is a loan that offers low interest rates during the first two years of the loan tenure. Here the interest rates are artificially kept low in the initial few years to attract the borrowers. The borrowers get tempted to avail the teaser loan as in the initial years the EMI is comparatively low. Thereafter the interest rate soars. It is also known as ‘2/28’.

For example: A loan starts off with an interest rate of 9% for the first two years. Third year onward, the interest rate rises to 11.5%. Thereafter, the interest rate fluctuates based on the Prime Lending Rate.

The teaser loan is a risky product as the borrowers tend to default when the interest rates jump.

It is available only for floating/adjustable/variable rate loans.

The prepayment penalty is relatively high.

Retirement planning is one of the most important components of financial planning. It is a process where financial planning is carried out to financially support for the period after retirement. An individual saves enough during his life when he is working, to invest in different assets to create a corpus when he retires. This corpus which is invested can generate income and fund an individual for his personal expenses after he retires.

As a matter of fact 80% of the individuals in India do not plan for their retirement. Very few individuals start retirement planning when they are young. People end up planning when they are nearing retirement. This makes it very difficult for them to maintain the same standard of living after retirement due to lack of planning from the beginning. Retirement planning must be done from the first day an individual starts earning until the last day. Thereafter it must be periodically reviewed.

The importance of retirement planning is increasing due to change in the financial situation of the country. Other reasons abound, like:

• Life expectancy: Due to advancement in science the average life expectancy of an individual has increased. People are living more than expected. They need additional funds to finance their expenses.
• Fixed Returns: It is difficult to get fixed returns on the money that is invested as the interest rate keeps fluctuating. Interest rates depend on the market situation. Hence planning is essential.
• Inflation: Inflation must be considered. It is very important that investments give returns more than the inflation.
• Decline in joint family system: Most families are now nuclear. So after retirement individuals have to take care for themselves.
• Increasing medical expenses: Old age brings on increased medical expenses.
• Lack of government support: Unlike other countries, the Indian government does not really support the retired individuals. Therefore each one has to plan for retirement.

With the explosion of nuclear families in India, senior citizens are finding it increasingly difficult to finance their personal expenses. Old age is filled with problems that never seem to end. Elderly people find it difficult to meet their medical expenses within the usually small pool of investments that they have made. It becomes challenging for them to live their life with contentment

Though government employees do get their regular pension when they retire, it is no where near enough to meet their needs upon retirement. For self-employed and other salaried individuals the situation is worse, especially if they do not have any savings.

In India there is barely any financial assistance provided by the government for senior citizens who have retired and do not have any regular source of income. It was in this regard that the Union Budget 2007-08 introduced comprehensive guidelines for the concept of reverse mortgage.

Reverse mortgage is a scheme that provides mortgage loans to senior citizens above 60 years, who might not be eligible for any other type of loan. Senior citizens can mortgage their house property to a lender. The lender in return makes periodic payments to the borrower during his/her lifetime, up to a maximum period of 15 years. The borrowers can continue to stay in their mortgaged houses as long as they live. The borrowers are not obliged to repay the loan; the lender simply attaches the property if the borrower and his/her spouse pass away. Even if the borrower and his/her spouse were to outlive the tenure of the reverse mortgage, they can live in that house until their last days. They would just stop receiving the installments from the lender.

Reverse mortgages have a host of advantages, the main among them being that senior citizens have a viable income now to meet expenses. Since this is a secured mortgage instrument, the borrower does not require a regular source of income to be eligible for the loan.

The borrower can continue to stay in the mortgage house till he/she and spouse pass away or change residence, while receiving the periodic payments from the lender. While the property is hypothecated to the lender, the borrower will remain the owner of the property throughout the tenure of the loan. The reverse mortgage can be disbursed in regular installments or as lump sum.

However, the concept of reverse mortgage has not yet picked up in India, though it is very popular in the West. Since it is a new model there is a bit of confusion among the borrowers as well as lenders.
The tax treatment is not yet very clear as to whether the monthly payments accruing to the senior citizen after mortgaging the home should be treated as an income and hence taxed, or just be treated as a loan. There is also no clarity on whether the lender has to pay a property gains tax on the sale of the property.
Banks are finding it difficult to work out the interest component to be charged on reverse mortgage. Moreover, they insist on insurance cover for this product, but there aren’t any insurance products to back this concept.

The author is a Research Analyst at Apnaloan.com Services (P) Limited.