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Alimony of Divorce and its Tax implications

Marriage is considered the coalescence of two souls. This intimate union of two people comes to us from the hand of God. Apart from the true love and compatibility that marriage offers, your marriage can also save you tax. There are various tax benefits that a spouse can avail after marriage. When the income of a couple is combined, it becomes easier for them to avail of the high amount of loans and enjoy the tax deductions separately. However, not all marriages last forever, there are situations when the emotional connect is lost, and the marriage comes to an end. In the present times, people seem to have less patience and tolerance power resulting in increased divorce count. Divorce is the act of legally concluding a marriage. Dissolving a marriage brings in a whole new set of issues including the decreased amount of happiness, financial burden, alimony of divorce and many more. This blog shall give you a complete overview of the financial after-effects of a divorce.

What is Alimony?

Alimony is the financial support a person has to provide to his/her spouse after divorce. It’s not that every former spouse receives alimony. Alimony is rewarded only when a former spouse is unable to fulfill his/her needs without financial support from a spouse who can afford to pay.

Different Types of Alimony of Divorce

Short Term Support

Judges order short-term support when a marriage ends in a short period. Short term support lasts only a few years. The last date of spousal support is mentioned in the court order at the time of divorce.

Rehabilitative Support

This is a special kind of short-term support designed to help the dependent spouse to get back to work and start earning to meet the daily financial needs. This type of support is also known as “bridge the gap” support and lasts until the recipient of alimony is back to work. The last date of support is not decided in the court beforehand. However, the support payment stops when the dependent spouse becomes employed in the industry.

Permanent Support

Generally, long term or permanent support is granted after long marriages when a spouse will never able to join work and need indefinite support. Eventually, the permanent support also ends on the death of either of the recipient or the spouse paying support.

Reimbursement Support

This support is not completely based on financial needs; instead, it is a way to pay back the spouse who sacrificed his education or career advancement to support the family. Termination of reimbursement support does not depend upon events like re-marriage of the recipient or spouse getting work.

Taxability of Alimony of Divorce

The Income Tax Act does not have any provisions related to the taxation of alimony. Alimony is either paid as a lump sum amount at once in the form of cash or it is paid on a monthly basis. Let us understand the conditions on the taxability of alimony.

Non Applicability of tax on Alimony

No tax is levied on alimony paid after divorce if the payment is made in a lump sum in the form of cash. This alimony is considered as a capital receipt and does not fall under the head of income.

Applicability of Tax on Alimony

Alimony is paid monthly in the form of cash which is considered taxable. In such a case, alimony is treated as revenue in nature. The recipient of alimony every month has to pay tax on the amount received from an ex-spouse. Additionally, the ex-spouse will also not be able to claim the amount paid to his/her spouse as a tax deduction.

Therefore, it is clear from above only monthly alimony payments are treated as income in the hands of the recipient and are liable to tax.

Tax implications on Alimony of Divorce transferred in the form of an immovable property

When a spouse makes an alimony settlement over immovable property, in such a case no tax is implied on the property. For example, if a husband owning a house gives 50% right in the house as an alimony settlement, the transfer of 50% right to his wife is not a taxable event. This transfer is treated of the nature of gift/ settlement and is not taxable as per Section 47 of the Income Tax Act. Therefore, assets received as alimony are treated similar to that of assets acquired in the form of settlement/gift. Such a transaction is not considered as capital in nature and is exempted from tax.

Tax implications on Income Earned from Alimony of Divorce

Any income that is earned by a person from an asset received in the form of the Alimony of Divorce is taxable under the Income Tax Act. The recipient of the asset after divorce has to pay the desired tax on the income gained from the asset received. However, on selling the assets, they will turn into a ‘capital’ in nature, and hence no tax shall be imposed.

Taxability on the Net wealth of the Spouse

All the assets that are transferred by a spouse without considered eventually becomes part of the net wealth of the recipient. Hence, the tax is applied accordingly on the wealth gained out of assets after divorce.

Conclusion

While going in for a divorce, it becomes crucial to go through the tax implications on the Alimony of Divorce. After a divorce, the alimony payment received by a spouse in the form of a lump sum amount is not taxable. However, the alimony payment received every month is treated as ‘income’ in the hands of the recipient and is taxable in nature. Therefore to avoid taxman alimony payments should be taken in the form of a lump-sum amount.