You may have annulled your marriage, but in case of alimony due to a divorce or separation, the tax laws don’t leave you
- The nature of alimony decides on the tax incidence in case of divorce or separation
- In case of financial support to the child in case of divorce, the said income for the child is clubbed with that of the parent with whom the child lives
- Make use of the alimony in a tax efficient manner
These days divorce and separation is becoming more common than it was a decade earlier. The emotional trauma of separation is one thing, the financial implications of the outcome is another – recently divorced individuals may pay or receive alimony. If this is your situation, here are some tips for how to correctly treat the payments on your tax return. But, the first consideration is the definition of alimony. Alimony is an American concept and term which signifies a legal obligation to provide financial support to one's spouse from the other spouse after marital separation or from the ex-spouse upon divorce.
Alimony is established by divorce law or family law and is based on the premise that both spouses in theory have a legal obligation to support each other during their marriage or upon separation or/and divorce. It is for this reason that alimony is also said to be the allowance which husband or wife by court order pays to other spouse for maintenance while they are separated or after they are divorced. An increasing awareness among people on the concept of alimony and financial support that one can claim at the time of a divorce has only resulted in alimony becoming a big factor to consider at the time of a divorce.
Arriving at alimony
To arrive at the alimony amount, the court has set about a few details. For instance, marriages that last more than ten years are entitled to be granted a lifelong alimony. And, at the time of granting alimony, age of the spouse is also taken into consideration while awarding alimony. Normally a young recipient of alimony gets it for a smaller period of time if the court thinks that he or she will soon be able to become financially sound through prospective career excellence. Alimony is also in vogue in order to equalise the economic condition of both the spouses. The higher earning spouse is entitled to pay a heavy amount as alimony.
The spouse who is projected to be enjoying a prosperous career is liable to pay high alimony amount. If one of the spouses is suffering from poor health, the other is subjected to payment of high alimony to ensure proper medication and wellbeing of the other spouse. The terms and conditions of payment of alimony in India vary from one personal law to another.
Role of tax
And, for those assuming that alimony is paid only by the husband, these days even wives are paying alimony to their estranged husband. As always, wherever there is a financial transaction of any kind, there is also the issue of taxes that come into play. For the sake of taxation, income is defined under Section 2(24) of the Income-tax Act. But, this does not specifically cover ‘Alimony’. But at the same time this definition is an inclusive definition and hence whatever can fall under natural meaning of the word ‘Income’ is covered under this definition.
So, when a divorcee receives alimony from estranged spouse, it constitutes as a part of capital receipt. Considering that you are receiving a lump sum amount, it will fall under capital receipt; hence you will not have to pay any tax on it. This is because the amount received is not in exchange of any services offered towards any business, vocation or employment, which is what results in paying taxes in case of capital receipt. Therefore, the amount that you would receive as alimony would tax free.
However, if the alimony is received on a monthly basis, it will be treated as revenue receipt and hence it will be taxable. In such a case, the law interpreted here is that a onetime lump sum amount received will be treated as capital receipt and monthly amount (considered as income) as capital receipt. To return to the question of taxability, though alimony cannot be said to arise from any particular “source” or be treated as a consideration for any past service, business or vocation, it is taxable in the hands of the recipient as per the ruling of the Mumbai High Court.
In case of alimony, which also includes maintenance of a child, the tax treatment gets complicated. The income tax exemption on the money deposited in a single parent’s account as maintenance for a minor child was foreseen by the tax authorities long ago. In a recommendation submitted to the Punjab and Haryana High Court and the Law Ministry, the law panel has recommended against granting such an exemption in its report ‘Prospects of exempting income arising out of maintenance money of minor’.
“The Commission is of the view that income earned by way of interest on the amount of maintenance deposited in favour of the child does not require to be exempted from being clubbed with the income of the parent/guardian; as such exemption, if granted, would open flood gates of tax evasion…,” it said. There are several incidents that are unique to separation and divorce, which one going through separation should know so that they can act accordingly.
Do not treat alimony as a simple payment by one spouse to another after they separate, because that is not how the tax authorities perceive it. The view of the tax authorities is that any money received should be classified under some source of income and taxed accordingly. So, in case you get into a situation leading to alimony or know of someone going through separation, make sure that they are well informed about the tax implications of the situation.