In India, a court decides how much maintenance one spouse will pay to the one earning less or having no income at all. The maintenance could be in different forms: one-time, periodic, or transfer of assets. Different types will have different tax treatment.
However, it must be noted that the Income Tax Act,1961, does not contain specific provisions on the same. Relevant case laws, along with analogous provisions, are used to determine its taxability.
Tax on maintenance
The lump sum maintenance a spouse receives is not taxable. It is tax-exempt because it is considered a capital receipt, which does not fall within the ambit of the Income Tax Act.
Sometimes, a spouse might prefer regular maintenance, that is, a monthly payment. Regular maintenance is taxable as “income from other sources” as it is considered a revenue receipt, said chartered accountant Naveen Wadhwa, vice-president, research and advisory division at Taxmann, an online source for taxation research.
However, chartered accountant Ashish Karundia has a different view. “The periodic payments are the very condition of divorce, based on which the court issues the divorce decree. The spouses remain married at the time when the periodic payments are agreed, so no question of taxation on this amount for them being relatives. Since divorce was agreed upon on this very condition, the amount remains tax-free even after the divorce decree is issued,” he said.
Any fresh arrangement, not part of the initial divorce decree, will be taxable. For example, spouses may demand enhanced compensation adjusted against inflation. “The enhanced amount becomes taxable in the hands of the receiving spouse because it happens after the divorce decree was issued,” Karundia added.
Tax on transfer of assets
Suppose a spouse transfers property to the other spouse as part of maintenance. Under Section 47 of the Income Tax Act, a transfer to a former spouse as part of a divorce settlement is not regarded as a “transfer” for capital gains purposes. However, if the former spouse generates income from it via receiving rent or sale, it will be taxed in his or her hands.
“If a property is gifted between spouses, no capital gains tax arises to the donor. The recipient spouse will not be taxed either on the value of the gifted property because a spouse falls within the definition of relative. However, the clubbing provisions will apply to any income generated further on the same,” Wadhwa said.
“It ceases to apply if the transfer is made in connection with an agreement to live apart, in which case the income from the property would be taxable in the hands of the recipient ex-spouse,” he added.
If property is transferred after the divorce has taken place (excluding a transfer that had been agreed upon as a precondition), it will be taxed in the hands of the receiving spouse.
Separation
Any kind of maintenance will not be taxable if a couple lives separately without divorce because, in the eyes of the law, the spouses are still married and would qualify as relatives, Karundia said.
Can a paying spouse claim a tax deduction?
It is not possible. Maintenance is considered a personal expense and not tax-deductible for the payer. However, some courts might consider your post-tax salary instead of gross salary when deciding the amount of alimony. It is important to note that deductions such as employee provident fund, insurance premiums will not be excluded from your salary when the court determines your income.
“Different courts look at it differently. It is up to the spouse and the lawyer to present their case wisely. For example, a person earning ₹1 lakh a month may have to pay ₹20,000 in taxes. If a court asks him to pay 50% of his gross salary, ₹50,000 per month will go to the spouse, ₹20,000 in taxes, and he will be left with only ₹30,000. That said, the court may only consider his post-tax salary, that is, ₹80,000,” Karundia said.
In cases where the court has specifically ordered that a certain property will go to the spouse, the income out of such property will be taxable in his or her hands directly. The paying spouse will not have to add such income to his or her taxable income.
For example, a spouse owns a two-floor house. “If the court orders that rental income from one of the floors will belong to the other spouse, it will be taxable in the latter’s hands. This arrangement is called an overriding charge, that is, redirecting income to the other party before it becomes taxable for the original recipient,” Karundia added.
