Going through a divorce is already tough, and when finances get involved, it can be even more challenging. One of the big questions that pop up during this time is- “Is alimony tax-deductible in India?”
Well, you’re not alone in wondering about this…
Many people in India face confusion when it comes to the tax treatment of alimony, whether they’re paying it or receiving it. So, in this article, we will break down everything about alimony tax and clear all the confusion.
Stay tuned!
What is Alimony?
Alimony, also known as spousal support, is a financial assistance given by one spouse to another after divorce. It is meant to help the financially weaker spouse maintain a lifestyle similar to what they had during the marriage. This can be either a one-time lump sum or regular monthly payments.
But when it comes to taxes, the situation gets a little tricky. How alimony is taxed depends on the form of payment—whether it’s a lump sum or periodic payment.
Lump-Sum Alimony: Is it Taxable?
If you or your former spouse receive a one-time lump-sum alimony, I have good news for you—it’s not taxable! Lump-sum alimony is treated as a capital receipt, which means it’s considered a one-time transfer of wealth, not regular income.
To make it clearer, let’s imagine your former spouse pays you Rs.10 lakhs as part of the divorce settlement in one go. This money is not considered your income, and therefore, you won’t be taxed on it.
Courts, including the Bombay High Court, have ruled in several cases that such lump-sum payments are not taxable.
So, if you’re receiving a large sum all at once, you don’t need to worry about taxes eating into that amount!
Monthly or Periodic Alimony: This is Taxable
Now, if alimony is paid in regular installments, the tax situation changes. Regular alimony is treated as a revenue receipt, which means it’s like regular income—just like your salary. And since it’s income, it becomes taxable.
For instance, let’s say you receive Rs.50,000 every month from your ex-spouse. This Rs.50,000 will be added to your total income for the year, and you’ll need to pay taxes on it according to your income tax slab. So, if you’re in a higher tax bracket, you might pay more tax on this alimony.
The courts have been very clear on this point—monthly alimony is taxable in the hands of the recipient.
Tax Implications for the Person Paying Alimony
You might be thinking, “Okay, but what about the person paying alimony? Do they get any tax benefits?” Sorry to burst your bubble, but the answer is “no”. The person paying the alimony, whether it’s a lump sum or periodic payments, cannot claim any tax deduction.
That’s right!
Even though you’re giving money for someone’s maintenance after divorce, the Income Tax Act, of 1961, doesn’t allow you to deduct alimony from your taxable income. Whether you pay it monthly or as a lump sum, it’s still considered a personal obligation and offers no tax relief for you…
Transfer of Assets as Alimony
What if, instead of giving money, you transfer property or assets as part of the alimony agreement? Well, in that case, the tax implications can be a bit different. Here’s how-
(A) Before Divorce
If you gift your spouse a property or asset while you’re still married, there’s no tax liability for the recipient. This is covered under Section 56(2)(vii) of the Income Tax Act, which says gifts between spouses are tax-free during the marriage.
(B) After Divorce
Once the marriage ends, things change. Any asset you transfer to your former spouse can be treated as a “gift from a non-relative”. And guess what? This means the recipient might have to pay taxes on it.
For example, if you transfer a house to your ex-spouse, and its stamp duty value exceeds Rs.50,000, the entire value of that house could become taxable for the recipient.
Similarly, for other assets like jewelry or stocks, if their market value is more than Rs.50,000, the recipient will be taxed on their value at the time of transfer.
Income from Assets after Divorce
Now, if you’re the one receiving assets like a property or shares during a divorce settlement, you might be wondering about future tax obligations. Any income you earn from these assets (like rent from a house or dividends from shares) will be “taxable in your hands”.
Here’s an example- You get a house as part of your divorce settlement. If you decide to rent it out later, the rent you collect will be treated as your income, and you’ll need to pay tax on it.
Wealth Tax and Alimony
Though the wealth tax was abolished in India in 2015, it’s worth mentioning that earlier, the clubbing provisions applied to alimony too. If assets were transferred without consideration during the marriage, they were included in the wealth of the spouse who transferred them. However, after the divorce, the assets would be included in the recipient’s net wealth.
Now that the wealth tax is gone, this rule no longer applies, but it’s a good historical context to keep in mind.
Capital Gains Tax on Assets Received
Let’s say you received assets like property or stocks during the divorce, and later you want to sell them. What happens then? You’ll be subject to “capital gains tax” when you sell those assets.
The good part is, for calculating capital gains, the holding period of the asset will be taken from when your ex-spouse first acquired it. The cost of acquisition is also deemed to be what your former spouse originally paid for it.
So, if they bought the asset 10 years ago, the clock starts from then, and you might get a benefit if you sell it after a long holding period.
Wrapping-Up Alimony Tax in India
So, to sum it all up, whether alimony is taxable or not depends on “how” it’s paid, viz.-
- Lump-sum alimony: Not taxable, considered a capital receipt
- Monthly or periodic alimony: Taxable, treated as regular income
- For the payer: No tax deductions on either form of alimony
- Transfer of assets: After divorce, transfers are taxable for the recipient if their value exceeds Rs.50,000.
Divorces can be emotionally and financially stressful, but understanding the tax implications of alimony can make things a little easier. So, whether you’re paying or receiving alimony, knowing the tax rules can help you avoid surprises down the line.
Note: We have thoroughly covered various types of taxes. For more information visit the following articles-
- What is Inheritance Tax & what are its implications?
- What is the foreign remittance tax & how to reduce it?
- What is Pink Tax in India? Meaning & its Impact on Women
- How Real Money games in India plan to hit profit with the new tax regime?
- What is a Tourism tax? Who pays it & how does it work?
- What is the entertainment tax in India? Everything you need to know
- Why do only 5% of Indians pay tax? Reasons behind & what’s ahead
Thanks for reading 🙂
