Alimony and Income Tax: Alimony can be paid in three different ways – as a lump sum payment, regular monthly or annual payments (recurring payments), and as a transfer of assets. Tax rules may vary for all these categories.
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Alimony Taxation Rules: Nowadays, in many divorce cases, the husband has to give not only alimony but also a large part of his property to the wife. After divorce, alimony is given to help the financially weak partner, especially the wife, in living. This amount is given by the husband so that the wife can meet her expenses and remain financially secure. But many people have this question in their mind whether the wife will have to pay tax on this amount or property? Are there different rules for tax on alimony? Let’s know…
The question of whether tax will have to be paid on the alimony received by the wife after divorce (Is Alimony In India Taxable) or not, creates a big confusion for many people. Under the Indian Income Tax Act, the alimony received by the wife after divorce is generally not considered taxable income. However, in certain circumstances, tax may be levied on alimony.
According to experts, the taxability of alimony depends on how and in what form it is given. Alimony can be given in three different ways – as a lump sum payment, regular monthly or annual payment (recurring payment), and as a transfer of assets. Tax rules may vary in all these categories.
1. Lumpsum payment:
If the alimony is paid as a lump sum, it is generally considered tax-free. Such an amount is considered a “capital receipt” and is not considered income. The Bombay High Court had clarified in the case of Princess Maheshwari Devi of Pratapgarh vs CIT (1983) that a lump sum alimony should not be seen as income but as a transfer of a capital asset. However, if this payment is part of a mutually agreed deal, it can be challenged.
2. Regular monthly or annual payment:
If the wife receives alimony at regular intervals (every month or annually) after divorce, it is not considered a capital receipt but is counted as “income” and is taxed. The Delhi High Court had also ruled in the ACIT vs Meenakshi Khanna case that if the wife takes a lump sum amount as part of the divorce agreement instead of the monthly alimony, then it will not be taxed. But if this amount is received monthly or annually, then it will be considered “Income from Other Sources” and the wife will have to pay tax on it.
3. As a transfer of assets:
- If a property is transferred between spouses during or before divorce, the tax status depends on when the transfer took place.
- If the property is transferred before divorce, it is considered a gift and is tax-free. However, the income from this property (such as rent) is added to the income of the person who has transferred the property.
- After divorce, the spouses do not fall in the category of “relatives”. In such a case, the transfer of property becomes taxable. Also, tax has to be paid on the income from this property.
3. As a transfer of assets:
- If a property is transferred between spouses during or before divorce, the tax status depends on when the transfer took place.
- If the property is transferred before divorce, it is considered a gift and is tax-free. However, the income from this property (such as rent) is added to the income of the person who has transferred the property.
- After divorce, the spouses do not fall in the category of “relatives”. In such a case, the transfer of property becomes taxable. Also, tax has to be paid on the income from this property.
Alimony without divorce
If the husband and wife live separately without divorce and the wife receives alimony, its tax status depends on the basis on which this payment is being made. If it is part of a court order or written agreement, it will be considered taxable. If it is given without any legal declaration, it will be considered a gift and will be exempt from tax.
Does the person paying alimony get tax exemption?
The answer to this is no, no, the person paying alimony does not get any tax exemption on it. According to a decision of the Bombay High Court, the amount given directly to the wife from the husband’s salary will also be taxable under the husband’s income. It is considered a personal obligation and its benefit cannot be taken as a tax exemption.
What does the law say?
According to experts, there are no clear rules regarding taxation on alimony in the Income Tax Act, 1961. The Bombay High Court suggested in 1983 that clear rules should be made on this. However, till now there has been no change in this direction. Every case is different in divorce related alimony matters. Therefore, to decide this, one has to depend on the court’s decisions and the opinion of experts related to this matter.
