How can you save on taxes on alimony that you receive on divorce?
Alimony is an important aspect of the divorce process. In such a situation, it is important to understand how alimony is calculated? When will the alimony received from husband after divorce be taxable? How will the wife not have to pay tax on alimony?
They say that marriages are made in heaven, but divorces happen on earth. The cases of divorce have increased in the country, especially in the cities. Despite this, the rate of divorce in India is the lowest in the world. According to the Global Index data, the divorce rate in India is only 1 percent. Whereas, in Vietnam, which comes second, the divorce rate is 7 percent. Portugal has the highest divorce rate of 94 percent. The latest data shows how much Indians maintain their relationships with ease. Still, we hear cases of divorce in our neighborhoods. One important aspect of the divorce process is alimony.
So, is it important to understand how alimony is calculated and whether it is taxed or not? Let’s find out:
Alimony means maintenance allowance. It is a kind of financial assistance, which is given by the husband to the wife after divorce for her sustenance or livelihood. Usually, if the wife does not have enough resources for her own livelihood after divorce, then the husband has to legally give her a maintenance allowance.
Under Section 25 of the Hindu Marriage Act, the court can give permanent alimony to either the husband or the wife for financial security and sustenance. Getting maintenance allowance is not a legal obligation in every case of divorce. The interests of both the husband and wife are taken into account in these cases. If the wife is earning, but there is a difference between her and her husband’s income, then she can get maintenance allowance to maintain an equal standard of living. If the wife does not have a job, then the court decides about the maintenance allowance keeping in mind things like her age, education and earning capacity. In cases where the husband is disabled i.e. physically unable to earn and the wife is working, then the husband can get maintenance allowance.
Can cash, property or both be given to the wife as alimony?
Yes, cash, property or both can be given to the wife as alimony. The court decides on the amount and mode of payment of alimony. Court’s decision is based on various factors such as income and assets of both parties, duration of marriage, couple’s standard of living during marriage, age and health of both parties, etc. The court can also order a lump sum payment or a periodic payment of alimony. The court can also modify or terminate alimony if there is a change in circumstances such as remarriage or death of either party.
There is no separate provision in the Income Tax Act for the alimony amount received by the wife after divorce. In such cases, the tax liability on maintenance allowance is determined based on the general rules of tax and the decisions of the courts from time to time. If the woman receives maintenance allowance in lump sum, then it is considered as capital receipt. Income Tax Act does not consider capital receipt as income…Therefore, no tax will have to be paid by the wife on receiving maintenance allowance as lump sum after divorce.
On the other hand, if the maintenance allowance is of recurring nature, i.e. it is received monthly or quarterly, then it will be considered as revenue receipt. Revenue receipt is considered as income under income tax law. In such cases, monthly maintenance allowance will be taxable and the person receiving maintenance allowance will have to pay tax. Tax will be levied according to the income slab.
Can husband-wife claim any kind of tax deduction on alimony?
Under Section 24 of the Hindu Marriage Act, if the husband or wife does not have enough means of income, so that he or she can sustain himself or herself and bear the expenses of court proceedings during the trial. Then he or she can also ask for allowance for this…This is called temporary maintenance allowance or Temporary Alimony. In this case, the couple can get maintenance allowance until the court makes its decision.
Some other things related to maintenance allowance are also important for you to understand. The first thing is whether you will get maintenance allowance or not. How much will you get? This depends on case to case. In most cases of divorce, alimony is given in cash only. If someone wants to give any property as alimony by mutual consent, then it can be given. If a woman remarries, then she stops getting monthly alimony from her ex-partner, i.e. ex-husband, that’s why permanent maintenance allowance is taken in most cases.