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Tax implications you must be aware of when getting a divorce

06 December 2017
Tax rules in India change with a change in one’s marital status. If you are getting a divorce or are in the middle of one, take note of these.

A divorce can be a truly challenging time for a woman. Not only is it emotionally unsettling, but it also brings with it confusion and a lot of problems, especially if she isn’t financially and legally aware. Amidst all the upheaval and stress, she must now turn her attention towards her finances, and plan them well if she wants a secured future. Part of this planning is becoming aware of the various tax implications.

So, if you are going through a divorce, here are some things you must know.

Alimony: This is an amount given to a non-earning spouse by an earning spouse as a maintenance fee. Alimony is payable only when the couple is legally divorced.

 

Alimony is not taxable if:

It is paid in lump-sum or a one-time receipt in the form of cash. As per a decision by Bombay High Court, this alimony is treated as a capital receipt. Additionally, this does not fall under the head of income as in the Income Tax Act, 1961.

Alimony is taxable if:

It is paid monthly in the form of cash. In this case, the alimony is treated as a revenue receipt. In certain countries like the USA, a man who pays a monthly alimony to his ex-wife can claim this amount as a tax deduction on his income.

On the other hand, in India, if your ex-husband pays you a monthly alimony, you will incur tax on this amount. Additionally, your ex-husband will not be able to claim this amount as a tax deduction.


However, if your ex-husband only pays for certain expenses like rent of the home, child support (education fees) etc., instead of a monthly alimony, you will not have to pay tax on these amounts. 

What happens in case of an asset transfer?

During your marriage: If you were given an asset by your spouse without any payment it will be tax-free under Section 56(2)(vii) of the Income Tax Act.

After divorce: The asset will be treated as a gift and hence, will be taxable to you.

Some things you should know:

  • For assets with a market value above Rs. 50,000, other than immovable property (jewellery, securities etc.), you will have to bear the taxes at the time of the asset's transfer.
  • If the asset’s worth, when it was received, is lower than the market value - which exceeds Rs. 50,000 - the difference will be taxable.
  • Immovable assets like shares etc. whose stamp duty value is higher than Rs. 50,000, will be taxed.

Is the income earned from a transferred asset taxed?

Any income earned from an asset after a divorce is a taxable for you, if you are the recipient. Should you plan to sell the assets, it will then fall under capital gains tax, like any other asset that is sold.

What about wealth tax?

After a divorce, assets that have been transferred without consideration (without payment) to a spouse becomes part of the recipient's net wealth and wealth tax applies, accordingly.

 

Disclaimer: This Article is intended for general information purposes only and should not be construed as investment, insurance, tax or legal advice. You are encouraged to separately obtain independent advice when making decisions in these areas.

Topic: tax
 
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