Tax on Alimony
Tax on Alimony
Alimony is an integral part of a divorce, and the amount paid as alimony becomes a source of income in certain situations. However, there is no specific provision of the Income Tax Act, 1961, that governs the taxability of alimony.
What is alimony?
At the time of divorce, the court passes an order to direct the economically stronger (generally the husband) spouse to pay a certain amount to the economically weaker spouse. The alimony is either directed by the Court in its order or decided mutually by the couple at the time of separation.
In an order passed by the Supreme Court, it was prescribed that the amount of alimony should not be more than 25% of the husband's income.
The types of alimony are as follows:
● Permanent Alimony: Where the husband has to pay a certain amount every month, quarter or annually, as prescribed by the Court.
● Lumpsum Alimony: This is a one-time payment of alimony. There is no question of recurring payments in this case. The entire amount of alimony is paid in one go itself in lieu of property or any other assets accumulated by the couple.
● Rehabilitative Alimony: This kind of alimony is awarded when the economically weaker spouse is not enough self-sufficient and capable enough to take care of the children in custody. For example, the husband shall be paying alimony till the wife finds a job and finds financial stability. Rehabilitative alimony is monitored at intervals to check the progress/development. Accordingly, changes are made.
Is alimony taxable?
The alimony is taxable depending on the kind of it, which are explained here:
● Lumpsum Alimony: When one-time alimony or a lumpsum amount is transferred as alimony, it shall be considered as a capital receipt, and shall not be taxable.
● Recurring Alimony: When the alimony is paid per month, it is taxable in the sense that the amount is in the nature of revenue. It is taxable in the hands of the recipient. However, for this, the person who is paying the alimony, cannot claim any kind of deduction under the Income Tax Act 1961, for the alimony amount paid.
● Movable Property: The alimony can be in cash or n property. If the alimony provided, usually one-time alimony, in the form of jewellery, then it shall be treated as a gift under Sec. 56(ii) of the Act. As the tax is already paid at the time of buying the jewellery, and it is simply transferred from the capacity of one spouse to another, it cannot be taxable.
● Immovable Property: The immovable property such as a house, flat or land can be transferred as alimony. Here, the taxability depends on the kind of ownership over the property.
For example, the house in concern is transferred in the name of the wife as an asset. Later on, the property tax and other municipality or corporation tax shall be payable in the hands of the recipient.
On the other hand, if the flat is provided as rehabilitation alimony, which means the wife is allowed to stay until she becomes financially sound to afford a rtoof on her head, then it is not taxable in the hands of the recipient, because the ownership of the flat is not transferred. It is similar to the landlord-tenant relationship, where the tenant is not liable to pay any tax on the property.
Alimony cannot be exactly treated as a source of income, therefore, tax cannot be deducted at source i.e. TDS is not applicable. However, it is taxable subject to a certain condition, mainly the nature of the object treated as the alimony, and the ownership over it.