Every year, more and more people in India get divorced. Even though it's usually the last option, it's important to know who gets alimony and how it affects income tax from different sources of income.
This document covers
- Divorce, a legal process
- Types of Divorces
- Factors in computing Alimony
- Impact of Taxation on Alimony
- Taxability on Transfer of Assets
- Taxability of Rental Income Pre- & Post-Divorce
- Taxability of Minor Child Income Pre- & Post-Divorce
- Inheritance in Divorce
- Foreign Assets as Alimony to another spouse
- Filing of Income Tax Returns
1. Divorce, a legal process
To get a divorce, you have to "end your marriage". Divorce is a legal process that ends a marriage. Once divorced, the law doesn't see the husband and wife who are married as a couple. Generally, Divorce includes the following.
- Living apart from each other
- Legal Bonds of the marriage will be dissolved
- Division of Assets and Liabilities
- Custody of Child and Support
Divorce in India is generally covered by the laws based on Individual Religion. The major laws in India are Hindu Marriage Act (covers Hindus, Buddhists, Jains, and Sikhs), Muslim Personal law, Christian Marriage Act and Special Marriage Act.
2. Types of Divorces
There are 2 types of divorces in India.
2A. Mutual Divorce:
- It is the most common type of divorce in India.
- Both the wife and the husband must agree to end the marriage in order for it to be valid.
- Couples can get a divorce from each other if they have lived apart for at least one year.
- The couple needs to go to court and file a case together.
2B. Contested Divorce:
- Sometimes, one spouse will fight the divorce while the other partner does not. This is called a "contested divorce."
- The two people getting a divorce must file "Separate Petition" with the court. Based on the reasons given, the court will decide whether to grant the divorce or not.
- Different faiths will have different reasons for divorce. Adultery, cruelty, mental illness, the end of a marriage that can't be fixed, desertion, and so on are some examples.
- A controversial divorce can take a long time, cost a lot of money, and be hard to understand.
When one partner gives money to another spouse, this is called alimony. This type of income is also called maintenance or spousal support. The Hindu Marriage Act says that either partner can ask for alimony. It comes in two different forms.
- Interim Maintenance given during court proceedings.
- Permanent Alimony: It will be provided at the time of court’s final order. It will be provided post-divorce.
NOTE : Alimony is not voluntary but the spouse who wants alimony needs to claim.
4. Factors in computing Alimony
There are no set rules or methods for figuring out how much alimony should be paid. You can get alimony in the form of a big lump sum, a monthly payment, or both. When judges of divorce court decide how much alimony to give, they will look at a number of factors.
- Each spouse Income, Assets and Liabilities
- Social Status and Lifestyle of both the spouses
- Age and Health conditions of both the spouses
- How much it costs to take care of the child (education and housing)
- Duration of the marriage
5. Impact of Taxation on Alimony
There are no specific rules in the Income Tax Act about whether or not alimony is taxed. But there are some case laws that explain this.
- 5A. Alimony received in the form of Lumpsum Amount :
- Most of the time, lump sum payments are received all at once and are similar to capital receipts.
- According to the Income Tax Act of 1961, capital receipts are not income and are not taxed.
- So, alimony that comes in the form of lump sum is not taxable in the hands of receiving spouse.
- 5B. Alimony received in the form of Periodic Payments :
- When you get periodic payments, they will be regular payments, which are like revenue receipts.
- The Income Tax Act of 1961 says that revenue receipts are part of income and are taxed.
- So, alimony that comes in the form of regular payments is taxed by the person who receives it.
6. Taxability of Transfer of Assets
Taxability of Transfer of Immovable Assets, Shares, Mutual Funds to spouse post-divorce as alimony
- If the spouse transfers the ownership of immovable assets or Shares/Mutual Funds to another spouse as alimony, it will be treated as settlement and not considered as transfer. Hence Capital Gains tax does not attract at the time of giving alimony i.e., Transfer of asset.
- The person who gets the asset will have to pay capital gains tax if they sell it in the future. The price paid by the first owner will be taken into account as the cost.
7. Taxability of Rental Income Pre- & Post-Divorce
- Pre-Divorce: When a spouse gives an asset to another spouse while they are still married, the rental income they receive is usually taxed by the spouse who is giving the asset away. Clubbing provisions attract here.
- Post-Divorce: After the divorce, there is no longer a marriage between the husband and wife. So, if one of the spouses gets the property as alimony, the income from the property transfer is taxed by the spouse who got it. Once the divorce happens, Clubbing Provisions will not be attracted.
8. Taxability of Minor Child income Pre- & Post-Divorce
- Pre-Divorce : Generally, income of the minor child will be clubbed with the income of the parent who has the higher income.
- Post-Divorce : The income of the minor child will be clubbed with the income of the parent who maintains the minor child.
9. Inheritance in Divorce
- Ancestral Property in India is claimed by the legal heirs. Inheritance in India is based on birth right but not on marriage.
- A Divorced spouse has no right to claim the ex- spouse ancestral property.
- "Will" can override the inheritance laws
- If the assets like bank accounts were jointly owned by spouses, ownership rights unaffected by Divorce. After the demise of one spouse, the bank account will be inherited by the surviving spouse.
10. Foreign Assets as Alimony to another spouse
People who are non-resident Indians (NRIs) or tax residents who have foreign assets can give those assets to another spouse as alimony. The tax treatment would be as follows
- The spouse can gift the Foreign Assets also as a part of alimony to another spouse.
- When the spouse who has received the alimony sells the foreign assets, the spouse is required to pay the taxes on the gain.
- Also, the spouse who has received the foreign assets are required to disclose Foreign Assets while filing Income Tax Return.
11. Filing of Income Tax Returns
Filing of Income Tax Returns (ITR) are mandatory for both the spouses as one of the spouses is receiving alimony and another spouse is paying the alimony.