Reverse Mortgage – A regular income after retirement?!

Old age can be very challenging, or rather miserable, when there is no financial support from any source. Taking this into account, some of the finance companies have introduced the Reverse Mortgage scheme in India. This scheme originated in the United States and has gained popularity in the West since its inception. Reverse mortgage, as the name implies, is a kind of loan through which you get cash flow serially in return for pledging a property; primary target consumers being the senior citizens.

In this scheme, there is a reverse in the payment stream whereas in a normal mortgage, the borrowed or principal amount is paid back by the borrower in monthly installments (EMIs or Equated Monthly Installments) over a period of time. In other words, a senior citizen generally above the age of 60 can pledge his house with a bank or housing finance company (HFC) and get a regular income – be it periodic payments, line of credit or lump sum payment, entirely the borrower’s choice.

One of the main advantages of this scheme is that the borrower along with the spouse can continue to live in the house mortgaged for the rest of their lives.  The amount received through this scheme is considered as loan and hence there is no tax liability. After the death of the borrower or if he/she moves from the house, the bank or the HFC recovers the amount by selling off the house and the extra amount, if any, will be passed on to the borrower’s heirs. Or if the heirs would want to reclaim the property, they could pay off the reverse mortgage with accumulated interest. A few companies providing the Reverse Mortgage scheme in India are State Bank of India, Dewan Housing Finance Limited, Punjab National Bank and Union Bank of India.

The eligibility criteria set by the Reserve Bank of India (RBI) states that the person should be above 60 years of age and own a home to avail this mortgage. There is no need of any other income or other medical requirements. A revaluation of the property will be undertaken once every five years by the bank or HFC. The loan amount is set up to 60% of the property value.

Reports state that in the United States, the year 2008 topped with 112,000 Home Equity Conversion Mortgages (HECM) loans. Apparently, in 2011, owing to the financial crisis, the loans were at over 73,000 which had originated through the HECM program and figures indicate that the loans have decreased at the rate of 35% since 2008. The volume of the loans is expected to rise in future since senior citizens are to form a larger part of the population by 2025.

In India, this scheme had been introduced in 2007 but did not take off at the expected rate. Surprisingly, the number of Reverse Mortgage Loans availed in 2008 was just 150 out of a population of 80 million senior citizens in the country! It is probable that most of the senior citizens are hesitant in availing this facility. One of the prime reasons could be that they consider it painful to mortgage a house that has sentimental value for them, built with their meticulously saved funds intended as their contribution for their children. Another reason could be the inadequate awareness spread about this product. Few drawbacks of this scheme are the maximum available amount which has been set at Rs.50 lakhs, and the period of the mortgage, which currently limits it to 20 years. Instead of capping the loan amount to Rs.50 lakhs, amount should be an equitable percentage of the value of the property mortgaged.

In late 2010, a new product called Reverse Mortgage Loan Enabled Annuity (RMLEA) plan had been launched as a result of a tie-up between Star Union Dai-ichi Life Insurance Co. Ltd. and the Union Bank of India (UBI), which is a combination of Reverse Mortgage loan and Life Annuity. Under this plan, UBI will provide RMLEA to its senior citizen customers on their property. UBI purchases Life Annuity from SUD Life with the loan amount, which in turn will be disbursed by UBI periodically. One of the added benefits of this scheme is that the spouse also receives a monthly income or the amount after the annuitant’s death. This product is planned for re-launch by Life Insurance Corporation of India (LIC) along with the Corporation Bank.

However, it is expected that this new Reverse Mortgage scheme will gain more popularity with increased awareness created and taking into account the increased need for cash flow during one’s old age in the current scenario of high inflation.

Essential facts about inheriting a house!

The loss of a parent or loved elder is a painful incident in our lives. But along with it comes the complications of inheritance of which the most cumbersome is the process of inheriting an immovable property like a house. Where a clear will is absent the disputes regarding actual ownership and rights become a murky affair even among brothers and sisters. Even when there exists a clear will there can be several legal issues regarding inheritance of a house. It is in such circumstances that a good understanding of the rules and regulations governing inheritance of properties comes handy to the average man. Especially if has to face the challenge of placating multiple claimants and heirs.

First Things First

Before laying claim to any kind of property from the deceased one needs to make sure that there are no outstanding debts that have to be paid off. In case there are any debts or outstanding and unsecured loans they will have to liquidate before any division of the property can be thought of. All the heirs have to first agree upon the modus operandi of this debt clearance. In case there is ambiguity in the will and it does not match accurately with the total existing assets mentioned in it, legal advice must be sought while arriving at any kind of settlement. Lack of clarity in the will can lead to serious legal complications at a later stage which can be avoided by working in the right direction in the beginning itself.

Starting the Legal Process

The very first step in the right direction is to get hold of the testator’s will which can be obtained by applying along with the deceased’s death certificate to the district registrar. The registrar will open the sealed will in front of all the heirs and then hand over a copy to each applicant. In case the deceased has nominated only a single heir then only one copy will provided to him. In case there is no will then as per Hindu Succession Act the property will pass on to Class 1 heirs who include spouse, children and mother of the deceased. In case of absence of Class 1 heirs the Class 2 heirs comprising of father, grandchildren and siblings. If the deceased was a woman then the property is equally divided among the husband and children in case the woman has died in state (without a proper will). In case of the heir being a minor or disabled the property is transferred via a trust at a suitable point of time.

Once the legal ownership of the property for that heir is confirmed the next logical step is to apply for mutation of the house to local municipal authority. It is essential that mutation of the house only helps in updating the records of the government and in no way confirms ownership. However it is an essential step in cementing your ownership on the house. In order to apply for the mutation one needs to deposit all the relevant legal papers of the house, proof of inheritance through the Will, death certificate of the deceased and land records of the said property. A NOC from the other heirs is also required in case of multiple heirs. Any challenge to this application for mutation will be referred to the sub divisional magistrate. However the appeal for dispute must be within 30 days of the mutation order. In the case of multiple legal heirs to the property the mutation will be in name of all the heirs.

Once these legal formalities are over then the heir is at liberty to either reside in it or rent it out. He can even sell off the property at will as he is the sole owner of the house. In case of multiple heirs to the house, it is advisable to mark the division of property among them right at the time of mutation to avoid complications subsequently.

Thankfully, till date there is no inheritance tax in our country and one doesn’t need to pay any additional charges for a house inherited by him. However once the house is legally yours you may have to pay Wealth Tax in case the net worth of all your properties exceeds Rs. 30 L. An inherited house can greatly boost your total asset value or come as a savior in difficult times. Thus knowing the right provisions that are applicable will help you to get what is rightfully yours without any legal delays or hassles.

Gold loan business in transition!

The gold loan business had been performing steadily and grown with a very fast pace in last few years. The current situation has changed a lot, and now it is a dying business for NBFC whereas banks have taken advantage of this situation. Suddenly, a break has been put on by the RBI on NBFC’s gold loan business by setting in place a set of rules to curb the risk and gain control over the market. Recently, RBI has shown deep concern on the operational model of NBFC’s gold loan business.

What’s happening in gold financing market?

The cap of 60% loan by an NBFC against the total value of gold has hampered the volume significantly. Most of the gold financing companies (GFC) have already revised the growth target to be flat for this year. The RBI’s notice to arrange extra capital requirement for the NBFC from 10% (current) to 12% by 2014 would also bring strain on the working with these companies. Companies like Muthoot finance, Mannapuram gold and Shriram city union finance Ltd have decided either to halt the expansion plan or to cut the growth target drastically. NBFC is also closing down non-viable branches in many cities to overcome the setback. A loan on primary gold and gold coins has been also restricted by RBI.

GFCs in Bad Phase

The loss of NBFC would definitely provide an edge to the banks to grow gold loan business. Recently, RBI denied the request by NBFCs to frame similar regulation for the bank’s gold loan activity. It only shows RBI’s concern over NBFC ‘s capacity to handle the business and competence to fight an adverse situation. Gold is one of the most powerful investment assets in India, and its huge import volume has strained INR value over other foreign currencies in recent times. To bring out the gold deposited in home and lockers to market, RBI needs a stronger and reliable channel like banks, which are well regulated and controlled under its aegis. To confirm its stand and denying NBFC like regulation for the banks RBI had said that “They can’t be compared with the banks, even those that extend jewelry loans, as this may be a minuscule portion of the balance sheet, and all banks are diversified entities.” With RBI constituting a separate committee to study GFC’s role in rising gold imports, lending practices, borrowing profile, further regulatory tightening cannot be overlooked.

Can GFC Fight Back?

The restrictions and change in rule can have severe effect on the NBFC’s business in short term, but at the same time it has given time to come up with an even better product offering in the future. NBFC has a niche market segment, and its reach would provide an advantage over the banks for some years but to sustain longer in this market the gold financing companies have to play a bigger role by coming out with more products to diversify the risk and better competence against banks. The chances of joining hands to fight the situation are quite probable in this situation and such step would give an advantage to the GFCs in terms of size, power and presence. If no strategic decision is taken during this stage, then GFC’s market share will further drop in coming days. In this situation if any new regulation is introduced by the RBI, then it will snatch their business model and promote banks to get an invincible leading position.

Bangalorean, Think before pestify your sweet home

Mumbai: Days after Versova siblings Rameez and Rehab Chougle died in mysterious circumstances, their father Gayasuddin broke his silence and admitted to TOI that pest control was carried out in the house on July 3. TOI was the first to report on July 7 that the duo had been killed by alleged pesticide poisoning.
    Twenty-six-year-old
homoeopathic doctor Rameez died in his fifth floor apartment in Panch Dhara building, Yari Road, on July 4, while his sister, 27-year-old writer Rehab, passed away in hospital two days later. Both had suffered bouts of vomiting and diarrhoea before their condition worsened. “We have never denied that pest control was undertaken in our flat,” Gayasuddin said on Tuesday, outside the neighbourhood police chowky.
    Well into the investigation, deputy commissioner of police (zone IX) Pratap Dighavkar as well as Versova inspector Sharad Borse continue to deny this. “The police have never asked us this question. If they had, what cause would we have to shield the contractor who is a third person?” says the bereaved father. “At the time the deaths occurred, my wife Farzana was too distressed to give the officers much details.”
    Gayasuddin is a marketing professional with an insurance company in Oman. He arrived in India on July 4, after receiving word from his wife that his son was seriously ill. Rameez had passed away by then.
    Piecing together the sequence of events, Gayasuddin says a local contractor, Rukhsar Almelkar, had treated the two bedrooms of the flat for bedbugs on July 3. Rehab and Rameez used one room, while Gayasuddin and his wife Farzana have the other.
    Pest treatment started at 10am, by which time the siblings had left home. “Rameez returned around 5.30pm, while Rehab came back at 8.30pm. Maybe by negligence, they did enter their room. My wife’s room had been treated as well but she was busy cooking in the kitchen so she escaped the ill-effects,” he says.

Courtesy : TOI, Bangalore, 12/July/2012

Meaning of Repo, Reverse Repo, CRR, SLR and Bank Rates

How many of you read the news last week “RBI increases Repo and Reverse Repo rate by 25 bps” ? For most of us these words do not make sense, and we move on to next news item. Little do we realize that we are affected by these rates and a basic knowledge about it is a must.

So let’s first understand what these banking terms means, and then we’ll see how these rates affect a layman.

The present rates (as of 10th April 2010) are:

Bank Rate   

9.00% (w.e.f. close of business of  17/04/2012)

Decreased from 9.50% to 9.00% which was continuing since 13/02/2012

Cash Reserve Ratio (CRR)      

4.75% (wef 10/03/2012) -announced on 24/01/2012

Decreased from 5.50% which was continuing since 24/01/2012

Statutory Liquidity Ratio (SLR) 

24%(w.e.f. 18/12/2010)

Decreased from 25% which was continuing since 07/11/2009

Repo Rate under LAF     

8.00% (w.e.f. 17/04/2012)

Decreased  from 8.50% which was continuing since 25/10/2011

Reverse Repo Rate under LAF *        

7.00%(w.e.f.17/04/2012)

Decreased from 7.50% which was continuing since 25/10/2011

bps

It is an acronym for basis point and is used to indicate changes in rate of interest and other financial instruments. 1 basis point is equal to 0.01%. So when we say that repo rate has been increased by 25 bps, it means that the rate has been increased by 0.25%.

Repo Rate and Bank Rate

People often get confused between these two terms. Though they appear similar there is a basic difference between them.

Repo rate or repurchase rate is the rate at which banks borrow money from the central bank (read RBI for India) for short period by selling their securities (financial assets) to the central bank with an agreement to repurchase it at a future date at predetermined price. It is similar to borrowing money from a money-lender by selling him something, and later buying it back at a pre-fixed price.

Bank rate is the rate at which banks borrow money from the central bank without any sale of securities. It is generally for a longer period of time. This is similar to borrowing money from someone and paying interest on that amount.

Both these rates are determined by the central bank of the country based on the demand and supply of money in the economy.

Reverse Repo Rate

Reverse repo rate is the rate of interest at which the central bank borrows funds from other banks for a short duration. The banks deposit their short term excess funds with the central bank and earn interest on it.

Reverse Repo Rate is used by the central bank to absorb liquidity from the economy. When it feels that there is too much money floating in the market, it increases the reverse repo rate, meaning that the central bank will pay a higher rate of interest to the banks for depositing money with it.

CRR (Cash Reserve Ratio)

Banks are required to maintain a percentage of their deposits as cash, meaning that if you deposit Rs. 100/- in your bank, then bank can’t use the entire Rs. 100/- for lending or investment purpose. They have to maintain a portion of the deposit as cash and can use only the remaining amount for lending/investment. This minimum percentage which is determined by the central bank is known as Cash Reserve Ratio.

So if CRR is 6% then it means for every Rs. 100/- deposited in bank, it has to maintain a minimum of Rs. 6/- as cash. However banks do not keep this cash with them, but are required to deposit it with the central bank, so that it can help them with cash at the time of need.

SLR (Statutory Liquidity Ratio)

Apart from keeping a portion of deposits with the RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio.

Example

If you deposit Rs. 100/- in bank, CRR being 6% and SLR being 8%, then bank can use 100-6-8= Rs. 86/- for giving loan or for investment purpose.

How it effects us

Having understood the meaning of these banking terms, let us now see how we are affected by increase/decrease of these rates.

The central bank uses these rates to control inflation.

Banks earn profit by borrowing at a lower rate of interest from the central bank, and lending the same amount at a higher rate to the customers. If the repo rate or the bank rate is increased, bank has to pay more interest to the central bank. So in order to make profit, banks in turn increase their interest rate at which they take deposit from the customer and lend money to the customer. So the demand for loan decreases, and people start putting more and more money in bank accounts to earn higher rate of interest. This helps in controlling inflation.

An increase in Reverse repo rate causes the banks to transfer more funds to the central bank, because banks earn attractive interest rates and also their money is in safe hands. This results in the money being drawn out of the banking system, thus banks are left with lesser funds.

Thus, by lowering repo rate, central bank injects liquidity in the banking system and by increasing reverse repo rate it absorbs liquidity from the banking system.

Increase in SLR and CRR rate means that banks will have less power to give loans (see our example above), which again controls amount of money floating in the market; thereby controlling inflation. It also makes banks safer to keep money because banks will have a higher liquidity to meet the demand of customers. As we learnt from the recession, giving loans expose banks to great risks. So if banks have lesser funds to give as loan, they become relatively safer.

Conclusion

Thus we conclude that the central bank of a country uses these rates to fight inflation and to keep a check on economy.

Please post your comments to improve.

10 things to know while filing income tax returns

1. Collect the documents required for filing Income tax return

Every taxpayer should collate all income tax related documents for filing returns. So, here is a gist of the documents required:

• Abstract of bank statements
• Proof of investments and Form 16 (Salary certificate issued by the employer)
• Form 16A / TDS certificate
• Challan of tax payment made like advance tax or self assessment tax
• Proof of investments in propertyD
• Documents on purchase and sale of investments/assets
• Collect the TDS certificate and
• Collect home loan certificate

2. Select the IT return form

As per the source of income select the right type of income tax return form as it is the most important part in filing yoiur returns. Income tax department has prescribed different ITR forms to file the returns like ITR-1 (Sahaj), ITR-2, ITR-3, ITR-4, ITR-4S (Sugam). Assessees should choose the right form as required by them to file returns correctly.

3. Fill all the basic details

After selecting the income tax return form, fill the form with all the correct details as it is seen that most of the people ignore the correctness of basic details. Following details should be rechecked in your ITR Form:

• Personal details like name, date of birth, father's name
• Address
• Contact No. and e-mail address
• Jurisdiction of AO
• Tax Status and
• Details of bank account

4. Verify Form 26AS (Tax credit statement)

Income tax department has clearly specified to verify Form 26AS before filing ITR. So, one should check the tax paid on the income tax web site by verifying Form 26AS, which provides details of the income tax paid and the taxes deducted and deposited by the payer of income. If there is any mistake one needs to verify the same.

5. Claim deductions and loss return

Claim all deductions and fill all relevant information as required at the time of filing return in income tax return form as missing out on any one can result in a higher tax liability.

The most common deductions in such respect fall under the section 80C, 80D, 80G and other housing loans.

If there is a loss return, it should be claimed and the return filing should be done within the due date as prescribed u/s 139(1), or else the loss under the specified head will not be carried forward.

6. Disclose exempt incomes

Exempt income should be disclosed in income tax return even though no tax is required to be paid on the same like dividends, PPF interest etc.

7. Provide details of foreign assets

Assessee should provide details of all foreign assets held. Details in respect of following should be provided:

• Details of foreign bank accounts with the peak balance during the year
• Details of immovable property with total investment at cost
• Details of any other asset with total investment at cost
• Details of account(s) in which the person has signing authority and which has not been included above. Name of the institution in which the account is held, address of the institution, name mentioned in the account and peak balance/ investment during the year.

8. Timely filing and prefer online filing

Income tax returns filing should be done within the prescribed due date to avoid interest & penalty. Timely filing of returnss ensures faster processing of ITR and quick refunds if any.

Moreover, one should prefer online filing returns instead of manual filing to avail benefits of all the online facilities provided by the IT department.

In addition to this, following assessees are compulsorily required to file ITR online:

• Individuals and HUFs having total income exceeding Rs 10 lakh
• Individual/HUF who have foreign assets to report

9. Signing of ITR acknowledgement

One may file ITR with or without digital signature and in case of filing returns without digital signature an ITR-Verification (ITR V) is generated after filing of ITR which should be signed and posted to the CPC.

10. Maintenance of documents as proof

As a proof of filing income tax returns in the income tax department, an ITR-V/ITR Acknowledgement and ITR-V receipt should be collected and retained for future use.

Courtesy : Rediff

offbeat tax saving avenues!

Enough cannot be said about the importance of planning your savings and understanding tax components that you can utilise to maximize your income. One of the best ways to take the time to research and plan well in advance, is to start on this exercise right in the beginning of the financial year and not at the end of the it, when there are bound to be different constraints on the cash flow and also confusion over what to choose in the last minute frenzy.

It is critical to know all the possible ways one can save tax, to help plan your budget properly. The IT Act 1961 is loaded with big dollops of taxpaying/tax saving information. Ways to save tax have always been an interesting consideration for tax payers all across the world and the Indian tax payer is no exception. And since tax saved is money saved, we hold that to be completely justified. While some of the tax-saving avenues are well-treated by the tax payers in the nation, there are some roads to tax saving which are lesser known. Two of them are explained below.

Save tax for your contributions to political parties/charitable organizations

In India, you can enjoy a tax deduction if you have contributions to make to a political party. The IT Act says that any amount of money that is donated to an acknowledged political party can be lawfully claimed for deduction, under Section 80GGC (For corporate it is 80 GGB). This deduction was launched very recently, April 2010, and the same applies to any contributions made to electoral trusts as well.

There is no set upper limit for the deduction amount, but it can exclusively be claimed only if the contribution goes into the party funds.

It is interesting to note here that deduction on donations does not come into play if you are donating money to an individual. It is only applicable if you are donating it to specific organizations.

For example, Section 80G of the IT Act says that if you are donating funds to a charitable organization, you are entitled to get a deduction of 50%-100% for that.  However, note that there exists a ceiling here – the percentage of deduction is restricted to 10% of the donor’s (gross) total income. Also, only donations in cash are taken into consideration for the purpose and not donations in kind.

Needless to say that the amount of tax you can save is dependent on the amount that you contribute.

You would require a proof to claim this deduction and that’s a stamped receipt of the amount donated, from the party or the organization to which you have made the contribution.

Save tax for disabilities

The Indian taxman has a heart of gold and it is seen nowhere better than this. Section 80 U of the IT Act says that if a taxpayer happens to suffer from any of the listed disabilities (see below), he is entitled to a tax deduction of INR 75,000.

If the tax payer has a disabled dependent (spouse/parents/children/siblings) to support, Sec 80DD allows him to claim the same.

Disability list includes low vision, blindness, hearing disability, leprosy, loco-motor impediment, mental illness and mental retardation.

Things to note

§ This deduction is obtainable only if the disability is 40% at least.

§ For severe impairments, 80% or above, the deductible amount becomes more – 1 Lakh.

§ The dependent must be fully dependent for upkeep on the taxpayer and must not be claiming deduction for it independently under Sec 80 U.

Proof required to claim this deduction will be a disability certificate from a CMO of a government aided hospital or a civil surgeon.

More of such special deduction news for income tax is available in IT Act, 1961. Check further to know more.