Reverse mortgage deals provide good income

dubai - Banks will pay monthly, quarterly or annual amounts which will be treated as loans

Q: My mother has a house in Bengaluru, the price of which has considerably appreciated. She inherited this from my father. I want to ensure that she earns adequate monthly income to meet her household and medical expenses. To earn this income, she may have to sell this house and invest half the sale proceeds which will give her regular income, the other half being used to purchase a smaller residential unit. However, she would like to continue to stay in this property during her lifetime. Please advise.
- S. Venkat, Bahrain

A: If your mother sells her existing house, she may have to pay capital gains tax on the proportionate amount of capital gains which are not invested in another residential property. Instead of doing this, she has the option to enter into a reverse mortgage agreement with a bank. Under this scheme, the bank would pay her monthly, quarterly or annually amounts which would be treated as loans. A bank which gives the loan would ensure that the aggregate amount with interest would not exceed 40 per cent of the value of the house.

Banks would be able to recover the loan with accumulated interest only on the death of the borrower. The heirs have to right to settle the principal amount of the loan and interest, in which case the mortgage would be cancelled and the property will be transferred to the name of the heir as mentioned in the will of the deceased. If the heir does not pay off the loan and interest, the bank will sell the property at the best price available in the market and after discharging the capital gains tax liability of the deceased, the balance amount would be handed over to the legal heirs.

Q: With General Anti-Avoidance Rules becoming applicable in India, I want to know what arrangements would be covered by these rules.
- C.R. Venugopal, Dubai

A: The anti-avoidance rules would apply to an arrangement which is entered into or carried out in a manner which is not ordinarily applied for bona fide purposes, but the main purpose of which is to obtain a tax benefit. Anti-avoidance rules will also apply to an arrangement which lacks commercial substance or is deemed to lack commercial substance. An arrangement will be deemed to lack commercial substance if it involves round trip financing or a transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction.

An arrangement shall be deemed to lack commercial substance if it involves an accommodating party. Anti-avoidance rules are also made applicable to an arrangement which creates rights or obligations which are not ordinarily created between persons dealing at arm's length. An arrangement which results, directly or indirectly, in the misuse or abuse of the provisions of the Act would be governed by the General Anti-Avoidance Rules. GAAR will become applicable from the financial year 2017-18.

Q: I want to route my investments in India through a company which I have in Singapore. Will this help in claiming exemption of capital gains which I make in future on sale of investments?
- D.R. Patel, Sharjah

A: A new protocol has been signed by the Indian and Singaporean governments to amend the double tax avoidance agreement which was earlier entered into by the two countries. So far, tax exemption has been granted on capital gains in respect of shares sold in India. Under the new protocol, the existing tax exemption for shares acquired before April 1, 2017 will continue. However, for shares acquired on or after April 1, 2017, there will be a two-year transition period.

Capital gains arising from transfer of shares which were acquired on or after April 1, 2017, will be taxed at half of the domestic tax rate if the capital gains are made on or before March 31, 2019. For capital gains made after this date, tax would be payable at the normal rates in the country in which the company whose shares are sold is resident. Singapore has already notified the protocol as it has been approved by its Parliament. It is expected that the Indian Parliament will approve the protocol and it will be notified this month.

The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policy.