Rajiv and Anita had been married for ten years. Due to certain irreconcilable differences that cropped up between them, they decided to separate. Apart from the physical and mental toll that divorce proceedings inflict on both partners, Anita also had to sort out the complex financial implications of the divorce settlement.

She had numerous questions about alimony, the assets she was entitled to, and their tax implication. She wanted to know how much money she would actually have in her hand, post the divorce, to support herself.

Anita’s story will be familiar to many women undergoing divorce. Undoubtedly, divorce proceedings are a complex and time-consuming process. The monetary agreements arrived at as part of the settlement have their own tax connotations. Women have to be well aware of how much alimony they are eligible for, whether it is taxable and, if so, how taxation can be avoided in a legal way. The other questions in her mind would be the tax implications in case an asset is transferred to her name.

A look at these in detail.

Alimony and taxation

First the good news. Alimony, which is paid as a lump sum amount, is not taxable. As per the written law, lump sum alimony or maintenance is not classified as ‘income’ as defined under the Income Tax Act, 1961, and there is no specific provision that determines its taxability. As per taxation laws, this is considered as ‘capital receipt’.

However, if you receive the alimony as a monthly amount, it will be treated like a monthly salary or a ‘revenue receipt’, which is taxable. Also, the ex-spouse paying such alimony does not get a deduction against income. It is no doubt unfortunate that choosing to receive alimony every month as a safety net to meet expenses is subject to taxation.

However, this monthly alimony would not be liable for taxation if the ex-spouse pays a sum for certain expenses like house rent, school fees and household expenses.

Taxation on asset transfers

In the divorce process, a woman should be aware of the tax implications in case of transfer of asset, and the various rules related to this. In the course of marriage, if a woman was given an asset by her spouse without any payment, it is tax-free, according to the Income Tax Act.

However, the same asset after divorce will be treated as a gift and taxed.

In case the divorce settlement includes transfer of assets like securities or jewellery, whose fair market value is above ₹50,000, the value at the time of transfer is taxable and has to be paid by the recipient spouse. However, if these assets are valued lower than the fair market value by more than ₹50,000, the difference is taxable.

In case of immovable properties such as house or land, if the stamp value is more than ₹50,000, the entire value will be taxable in case the woman is the recipient.

In case these assets are sold in future, they would be subject to capital gains tax and have to be paid by the recipient spouse.

Any income gained from these assets, post the transfer, is also taxable.

These are some of the tax implications worth considering for a woman going through a divorce. She must consult a divorce lawyer or tax consultant during the separation process to know the exact tax implications pertaining to the case.

This will help her clearly negotiate the financial terms of the separation and help plan the finances prudently.

 

Hemanth Gorur

The witer is co-founder, Hermoneytalks.com and Managing Partner, Hubwords Media

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