Alimony and Tax Implications

Alimony or maintenance is a U.S. term signifying a legal obligation to provide financial support to one’s spouse from the other spouse after marital separation or from the ex-spouse upon divorce. It is established by divorce law or family law in many countries and is based on the premise that both spouses…

Meaning of Alimony

Alimony or maintenance is a U.S. term signifying a legal obligation to provide financial support to one’s spouse from the other spouse after marital separation or from the ex-spouse upon divorce. It is established by divorce law or family law in many countries and is based on the premise that both spouses in theory have a legal obligation to support each other during their marriage or upon separation or/and divorce. Alimony can also be said to be the allowances which husband or wife by court order pays to other spouse for maintenance while they are separated or after they are divorced.

Introduction

Though this is important matter to deal with during the litigation of a divorce case,Guest Posting the very perception of right to claim the financial support for post divorce maintenance was not quite a familiar concept among the Indian divorce seekers, especially women even few years back. But as the rate of divorce is increasing in India at a rapid speed, people are becoming aware of the various details related to divorce laws. The era of feminist campaigns, and spread of education have contributed to the growing recognition of alimony in divorce cases.

The alimony is an obligation by laws in almost all the countries of the world. It is expected that both the spouses irrespective of the sex must bear the maintenance support during and after marriage. According to marriage conventions marriage is a sacred union. Once the knot is tied, the duties and obligations of marriage are to be carried out for the rest of the life even if there is mental disparity or physical separation between the husband and the wife. The husband is bound to take up the responsibilities for the maintenance of his wife in spite of sharing an estranged relationship. As time changed, the laws and education empowered woman, divorce came as a natural solution for an abortive wedding.

The present society treats men and women equal, as a result the burden of alimony can now fall upon either side of the party depending upon the financial conditions of the spouses. Though in the present age of egalitarianism both men and women are now equal in the eyes of law, in practice men are more liable to provide interim support to their ex spouse during the litigation procedure.

After divorce either of the spouse has the right to claim alimony. Though not an absolute right, but can be granted by the court depending upon the circumstances and financial conditions of both the spouses.

The following are the conditions depending on which alimony is awarded by the court.

Alimony is generally not granted to the seeking spouse if he or she is already receiving support during the time of divorce. Although the rewarding of alimony can be revised in such events based on the arguments for claiming the support. In case of a contested divorce, often spouses fail to come to any understanding regarding alimony. In such situations, the court takes up the task of making a decision on the amount of alimony to be paid.

The sum and period of alimony generally depends upon how long the marriage existed. Marriages that lasted more than 10 years are entitled to be granted a life long alimony. Age of the spouse is also taken into consideration while awarding alimony. Normally a young recipient of alimony gets it for a smaller period of time if the court thinks that he or she will soon be able to become financially sound through prospective career excellence. Alimony is also in vogue in order to equalize the economic condition of both the spouses. The higher earning spouse is entitled to pay a heavy amount as alimony.

The spouse who is projected to be enjoying a prosperous career is liable to pay high alimony amount. If one of the spouses is suffering from poor health, the other is subjected to payment of high alimony to ensure proper medication and well being of the other spouse. The terms and conditions of payment of alimony in India vary from one personal law to another. The Shah Bano case is one such instance that exposes how the sustenance of a divorced woman is affected due to inclusion of inappropriate laws regarding post divorce maintenance and financial support.

Taxability

Now with this background about ‘Alimony’, let’s look at the taxation of the alimony in the hands of the receiver. The following factors need to be considered in this regard:

The word ‘Income’ is defined in S. 2(24) of the Income-tax Act. This definition does not specifically cover ‘Alimony’. But at the same time this definition is an inclusive definition and hence whatever can fall under natural meaning of the word ‘Income’ is covered under this definition. Now to look at the natural meaning of the word ‘Income’, we must consider the following factors.

The Income Tax Act classifies income into two categories – ‘revenue receipts’ and ‘capital receipts’. Generally, revenue receipts are taxable income and are subject to certain deductions/exemptions, whereas capital receipts are non taxable.

When a divorcee receives alimony from estranged spouse, it constitutes as a part of capital receipt. Considering, that you are receiving a lump sum amount, it will fall under capital receipt, hence you will not have to pay any tax on it. This is because the amount received is not in exchange of any services offered towards any business, vocation or employment. Therefore, the amount that you would receive as alimony would tax free. However, note that if the alimony is received on a monthly basis, it will be treated as revenue receipt and hence it will be taxable. In such a case, the law interpreted here is that a one time lump sum amount received will be treated as capital receipt and monthly amount (considered as income) as capital receipt.

To return to the question of taxability, though alimony cannot be said to arise from any particular “source” or be treated as a consideration for any past service, business or vocation, it is taxable in the hands of the recipient as per the ruling of the Mumbai High Court. The judgment concludes that monthly alimony received by a divorcee from an estranged spouse will remain taxable, while a one-time alimony payment will be a capital receipt and won’t be taxable.

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