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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.
In some cases, alimony may be provided through assets, such as property, stocks, or other valuable items
Tax On Alimony In India: Navigating the complexities of taxation can be challenging, especially when it comes to alimony payments during or after divorce. While alimony provides financial relief to one spouse, it often raises questions about its tax implications for both the payer and the recipient. Is alimony taxable in India? How does it differ for lump sum payments versus monthly instalments? What are the legal and financial nuances to keep in mind?
In this article, we break down the taxation rules on alimony in India, with expert insights from Dr. Suresh Surana, a leading Chartered Accountant. Whether you’re paying or receiving alimony, understanding these guidelines is essential to avoid any surprises during tax season.
Tax On Alimony In India
Surana says that in India, the taxability of alimony under the Income Tax Act, of 1961 has not been clearly provided. As such, the discussion on taxability may depend on its characterisation i.e. type of payment and nature of asset:
(i) Alimony Through Cash:
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, 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):
Surana points out that 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 a 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 cases 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.
Surana underlines that it is pertinent to note that any payment made to another spouse as alimony shall not be allowed as a 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.
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