Money matters: Divorce can take a toll both emotionally and financially, as coping with the changes and new single status can be incredibly challenging. For women going through this difficult time, it is crucial to have a clear understanding of the financial complexities that come with such emotional duress. This understanding is key to ensuring their future financial security.
Alimony, also referred to as spousal support or maintenance, involves regular or periodic payments made by a husband to his ex-wife after a divorce or separation, as per the regulations outlined in the Hindu Marriage Act of 1955.
It is crucial for women who receive alimony payments to understand the implications for taxes. While these payments offer crucial financial support, it is important to comprehend how they are taxed and how to effectively manage tax liabilities.
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The Income Tax Act 1961 does not contain specific provisions regarding the taxation of alimony. Therefore, the taxation of alimony is determined based on various case laws. In general, capital receipts are considered non-taxable, while revenue receipts are taxable. It is essential to have a clear understanding of how taxation applies to different situations involving alimony.
“In India, taxability of alimony under the Income Tax Act, 1961 has not been clearly provided. As such, the discussion on taxability may depend on its characterization i.e. type of payment and nature of asset,” Dr Suresh Surana explained.
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Here are the details:
(i) Alimony Through Cash:
> Lumpsum Alimony:
Any one-time lumpsum payment received as alimony would be treated as capital receipt and shall not be taxable. This is also supported by the ruling of the Delhi High court in the case of ACIT vs. Meenakshi Khanna 34 taxmann.com 297 (Delhi) wherein it held that lump sum alimony received against consideration of relinquishing the personal right of claiming monthly payments as provided under the divorce agreement will be treated as capital receipt and will not liable to tax.
> Periodic Alimony (Recurring Payments):
When alimony is paid in regular monthly instalments, it is considered revenue receipt and could be taxable in the hands of the recipient as “Income from Other Sources”. The recipient must include these payments in their total taxable income and pay tax as per the applicable marginal slab rates.
(ii) Alimony Through Assets:
In some cases, alimony may be provided through assets, such as property, stocks, or other valuable items. The taxation of such alimony, especially in the form of assets, is slightly more complex.
> Assets transferred before Divorce:
If assets are transferred before divorce, they may fall within the purview of gift from a relative (‘spouse’) and thus exempt from tax under Section 56(2)(x) of the Income Tax Act.
> Assets transferred after Divorce:
Once the divorce is finalised, the transfer may no longer be considered a gift between relatives (due to the lack of a husband-wife relationship) and may be subject to taxation in the hands of the recipient. However, in case where the transfer of such assets is part of a court order or formal agreement for alimony, it may not be considered a “gift” and therefore Section 56(2)(x) would not apply.
It is pertinent to note that any payment made to other spouses as alimony shall not be allowed as deduction while computation of taxable income. It is notable that taxation of alimony is a contentious issue as there are no clear provisions for taxability or non-taxability under the Income Tax Act.
Taxability of Lump Sum Alimony
Lump Sum Alimony is considered a capital receipt, which means it is not taxable under the Income Tax Act 1961. Even if it is not classified as a capital receipt, as long as it is received as part of an agreement to live apart, it will still not be taxable.
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Taxability of Regular/Recurring Alimony
On the other hand, regular or recurring alimony is treated as a revenue receipt and is subject to taxation. Recipients of recurring alimony payments are required to report this income in their tax return and pay taxes based on the applicable slab rate. Failure to declare this income may result in penalties and interest being levied by the income tax department.
Any income generated by investing the alimony received will be taxable in the hands of the recipient. It’s important to note that there are no clubbing provisions applicable to alimony, as the husband-wife relationship no longer exists.