As per the double taxation avoidance agreement, periodic payments made after divorce are exempt from tax in both contracting States.
Anuradha Venkataprasad decided to return to Hyderabad after severing her seven-year-old marriage in USA. Anuradha had already become a US citizen when she applied for the divorce in a Florida court in USA. She was awarded alimony by the courts in Florida, in accordance with US statutes. When she had to file an Income Tax return in India, she realised that the alimony award granted by the Florida court needed to be considered as income, but wasn't sure of its taxability implications.
Post divorce, Anuradha started receiving alimony under divorce and maintenance decrees. In USA, alimony is taxable income in the hands of the recipient, and a tax deduction for the payer. Even after her return to India, Anuradha continues to receive alimony. The question, of course, is if alimony is taxable in India.
DIVORCE
Marriages are made in heaven; divorce takes place on earth; death and taxes are inevitable. India has a low divorce rate. It is quite surprising that the divorce rate in India is one of the lowest globally, in spite of increase in the divorce rate.
Empowerment of women has initiated the dissolution of marriage in urban areas, as financially-educated women are now open to the option of ending the relationship rather than bearing with lifelong ill-treatment silently. In many cases, the financial independence of women leads to divorce decisions. In India, in a situation of divorce, an application for maintenance can be filed under the Hindu Adoption and Maintenance Act and under the Hindu Marriage Act.
However, irrespective of one's caste, creed or religion, any person can file an application for maintenance, under Section 125 of the Criminal Procedure Code. The court decides on the amount of maintenance based on the current living standard of the spouse applying, and also considering the entitlement of the applicant had he/she lived with the spouse.
TAXABILITY
To return to the question of taxability, though alimony cannot be said to arise from any particular “source” or be treated as a consideration for any past service, business or vocation, it is taxable in the hands of the recipient as per the ruling of the Mumbai High Court. The judgment concludes that monthly alimony received by a divorcee from an estranged spouse will remain taxable, while a one-time alimony payment will be a capital receipt and won't be taxable.
In USA, alimony is a taxable event in the hands of the recipient, while the payer gets deduction from his/her taxable income. Alimony doesn't include child support, non-cash property settlements, payments that are the spouse's part of community property income, etc.
If alimony is being withheld from a taxpayer's pay, either voluntarily or by garnishment, it's always after tax. Regardless of it being withheld, the payer can take an above-the-line deduction for it on Form 1040, line 31a when preparing the tax return. The recipient's Social Security Number must also be shown on that line, so that the IRS is aware whose return to monitor for it as taxable income.
As per the double taxation avoidance agreement with India and USA, periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, paid by a resident of a Contracting State to a resident of the other Contracting State, are exempt from tax in both Contracting States.
Just a decade ago, divorce was a dirty word in socially conservative India. The fear of social isolation, a sense of duty to extended families, and financial dependence put nearly unbearable pressure on couples to stay together. But as the economy has boomed, the rigid boundaries governing traditional Indian life are beginning to fall, especially among the growing urban middle-class.
As Helen Rowland stated, “These days, love is a matter of chance, matrimony a matter of money, and divorce a matter of course.”
However, current social directions force one to say that matrimony is more a matter of alimony these days.
(The author is a Coimbatore-based chartered accountant.)
Keywords: Global Village, double taxation avoidance agreement, periodic payments, divorce, taxability, alimony payment
Comments:
The author is insensitive; the question to him was about tax implications. He has no business to comment on social circumstances surrounding divorce
I disagree with Mr. Sankar's comment - the social circumstances
surrounding a divorce these days is very visible in public domain, and
any tax professional will always take that too into consideration, and
the parting lines of the article are a true commentary on the present
state of affairs. The author has dealt with the tax viewpoint, and his
business does not end there for your kind information.
I tend to agree with Jeyshree. It is not the alumni or cash alone that get divided and taxed in the hands of the receiver. It bothers and collapses the financial stability of the divided family as the children are also getting shared between couples during divorce process without the income of the main earner in the family.
Being in the US we are aware that the economy too forces some couples to delay the divorces. In our own Indian society, we witness unemployed divorced women are necessitated to find jobs or move with their own parents or relatives which add financial burden to the receiving families. The Hindu society treats them as out-caste and not involve them in auspicious occasions. These are additional painful rewards they receive and their children face a lot of challenges and they miss out joys of family life. Because of the marital turmoil, I think children pay a huge price by missing the love of both the parents..
Apropos of the statement that alimony is taxable in the hands of the recipient as per the ruling of the Mumbai High Court; the author is requested to give citation. As regards the subsequent that the judgment concludes that monthly alimony received by a divorcee from an estranged spouse will remain taxable, while a one-time alimony payment will be a capital receipt and won't be taxable, it is doubtful whether a divorcee can be called an estranged spouse.
If a house is received in lieu of monthly alimony (as per decree) and sold immediately after divorce, what would the holding period for capital gains? Also whether cost to the PREVIOUS owner could be taken for computing capital gains and indexation made for working out adjusted cost. Though there is no love between the estranged couple, would it come as a gift from husband and section 56 could be applied?
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