Tax on Alimony FAQs: What Assets Are Taxed And What Is Exempted? Expert Answers All Questions

Alimony has managed to create enough buzz and for all the wrong reasons. However, there are other financial aspects to it, which often raise questions about it. What are the tax implications on alimony in India? Who is the party liable to pay tax? Outlook Money spoke with CA Naveen Wadhwa, Vice President, of the Research and Advisory Division at Taxmann.

The Bombay High Court’s ruling in Princess Maheshwari Devi of Pratapgarh v. CIT [1983] 12 Taxman 220 (Bom.) offers significant clarity on this matter. According to the judgment, “When the alimony awarded is by way of monthly payments, it will have the character of income, as the definition of income is inclusive and encompasses in its meaning not only a return for labour or skill employed or capital invested but also voluntary receipts and receipts under a decree. The monthly alimony, being a regular and periodical return from a definite source, namely, the decree, is 'income' and is liable to tax.”

Conversely, the court also held that alimony received in a lump sum under a decree is a capital receipt. It further clarified that a lump-sum payment cannot be treated as a commutation of future monthly or annual payments unless the recipient already held a pre-existing right to periodic payments that were commuted. However, if monthly alimony is awarded under a decree but subsequently commuted to a lump sum, the amount would still be assessable as income.

Here Are The Edited Excerpt

What structure of alimonies is taxed?

We have covered the types of alimonies one can pay to his or her ex-spouse in the second query, which could be a monthly allowance or a one-time settlement. The point is, that the Income Tax Act is silent on the taxability of alimony. There is no specific provision that exclusively addresses the taxability of alimonies. 

In such situations, we need to refer to case laws decided by Indian courts. These courts state that monthly alimony or monthly allowances paid to an ex-spouse are taxable, just like any other income. On the other hand, alimony paid as a one-time settlement is treated as a capital receipt and is not taxable at all in the hands of the recipient's spouse or ex-spouse. That covers your first and second questions.

What is the difference in terms of taxation between taxation of monthly allowance and one-time settlement?

As mentioned, monthly allowances paid as alimony are taxable as income in the hands of the recipient. These payments are treated like any other regular income and must be reported and taxed accordingly. On the other hand, a one-time settlement is considered a capital receipt and is not taxable at all in the hands of the recipient. The distinction lies in the nature of the payment: monthly allowances are recurring income, while a one-time settlement is a lump-sum payment treated as non-taxable capital.

Who is liable to pay tax, the receiver or the payer?

The liability to pay tax lies solely with the recipient of the alimony. The payer is not obligated to pay taxes on the alimony amount as they are not the beneficiary of the payment. Even if the payer has already paid taxes on their income before making alimony payments, the recipient remains liable to pay tax on any monthly alimony received. This is because the payments are considered an application of the payer's income. Therefore, while regular monthly alimony payments are taxable, a one-time settlement remains tax-free.

Assuming the paying party is already taxed on their income and then they are paying the alimony, will it still be taxable on the receiver’s part?

Yes, it will still be taxable in the hands of the receiver. Even if the paying party has already paid taxes on their income and then pays the alimony, it does not affect the taxability of the alimony for the receiver. The alimony received is considered an application of the payer's income, and the recipient will be liable to pay tax on the amount of alimony they receive on a monthly basis. All regular payments are taxable in the hands of the receiver, while a one-time payment remains tax-free for the receiver.

Are there any exemptions available for the alimony payer for the amount they will be paying their former spouse?

There are no specific exemptions available for alimony payments. All the exemptions and deductions that you can otherwise claim, for example, under Section 80C or 80D, if you are under the old tax regime, can still be claimed. However, there is no specific exemption or deduction available for alimony payments.

Are assets given in alimony taxed?

Yes, but only specified assets, not all assets. And what are those specified assets? These are covered under Section 56, Subsection 2, Clause X. It covers three types of assets: one is money (money is not an asset in the traditional sense but is included here), the second is immovable property, and the third is movable assets. Movable assets include shares, securities, cryptocurrencies like bitcoins, art, drawings, jewellery, and similar items. 

For example, if after a divorce, a spouse gives alimony in the form of a one-time settlement that includes immovable property like a house, jewellery, or a car, the tax treatment will vary. The immovable property will be taxable under Section 56(2)(x). Jewellery will also be taxable. However, a car will not be taxable because it is not considered a capital asset. In the context of a one-time settlement, these transfers are treated as capital receipts and are therefore tax-free. However, if the alimony involves regular payments, the money is taxable in the hands of the receiver.

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