Taxability Of Lump Sum Settlement / Monthly Alimony Received At Time Of Divorce

user

Taxability of Lump Sum Settlement / Monthly Alimony received at time of Divorce

Taxability of Lump Sum Settlement / Monthly Alimony received at time of Divorce

Let’s first understand what is the meaning of divorce and type of divorce:

A divorce is the legal termination of a marriage by the order of a court in a legal proceeding, requiring a petition or complaint for divorce (or dissolution in some states) by one party.

There are two types of divorce

fault
no-fault

A fault divorce is a divorce where based on marital misconduct or other statutory cause requiring proof in a court of law by the divorcing party that the divorcee had done one of several enumerated things as sufficient grounds for the divorce, a judicial termination of a marriage is ordered by court due to this.

A no-fault divorce is one in which one party must allege and testify only that either irretrievable breakdown of the marriage or irreconcilable differences between the parties makes termination of the marriage appropriate and neither party is required to prove fault.

Once the divorce is ordered by court, the assets are shared between husband & wife as per court’s order. And one spouse may be required to pay a monthly alimony or lump sum amount to other spouse (In India, generally husband is required to pay to wife)

Now there are two broad questions:

This amount of monthly alimony or lump sum amount is taxable in the hands of recipient or not?
This amount of monthly alimony or lump sum amount is allowed as expense in the hands of the person who paid it.

There are no any specific provisions in Income Tax Act relating to Alimony. Relevant case laws must be studied to understand about taxation of alimony.

The general rule is that a capital receipt is non-taxable while a revenue receipt is taxable.

In a Mumbai High Court ruling, it was held that monthly alimony, being a regular and periodic return from a decree, would constitute taxable income.

While the lump sum amount received was held to be a capital receipt in nature and, hence, not taxable.

In the case of ACIT vs Meenakshi Khanna (ITAT Delhi) the agreement for custody, separation and divorce was entered into on 01.12.1989 & the divorce was finally ordered on 20.04.1990 and monthly instalments was agreed to be paid by the husband., later on this agreement was not honoured by husband. After intervention of court, a one-time settlement was given by husband.

The Tribunal held that this lump sum payment relating to the divorce agreement and not taxable in the hands of the wife.

Income from Assets transferred on account of divorce:

As per clubbing provisions any income from the assets gifted to wife is clubbed in the hands of husband. But this clubbing provision is applicable till the time marriage exists. After divorce, any subsequent income from these assets would be taxable in the hands of the recipient spouse.

Sale of assets acquired before divorce

As we know that any asset when sold is subject to capital gains tax, so in this case also capital gain tax is required to be calculated. Where assets received without consideration from spouse prior to divorce are disposed off, the holding period of the previous owner is also taken into account when calculating capital gain. And the cost of acquisition is deemed to be the cost at which the previous owner bought it.

So we can conclude this as follows:

1) Lump sum amount received on account of divorce is not taxable being considered a capital receipt.

2) Monthly alimony being revenue in nature will be treated as income in the hands of the recipient and hence taxable.

3) And there is no provision relating to treatment of payment made on account order of divorce in the hands of the person who paid is, so no deduction is allowed to him from his income.

If you want to come out of forced living, If you want to know the pattern and processes to live a healthy life without regrets, If you want to meet the REAL YOU…. below book is right choice for you