All You Need to Know about Taxation on Alimony


With divorce comes hand in hand another concern known as Alimony and its taxability. While divorce is the legal method of putting a relationship to an end, usually monetary compensation is provided to the financially weak party by the financially stronger one for them to maintain the same standard of living after separation. The term used for such compensation is “Alimony” which is a legal obligation in most countries.
In our country alimony is governed according to the personal laws and the provision of the Special Marriage Act. Another law regarding alimony is laid down in section 125 CrPc. It talks about alimony rights to wife given by the husband. Section 125, along with several other alimony rights, grants the right of Interim maintenance also. The Supreme Court in several of its judgment has made it clear that interim maintenance can be awarded before the final disposal of a case. Though there is no specific provision in the Code regarding interim maintenance judicial activism has helped in evolving this law as it respects the rule of law.
How is Alimony quantified and its taxability?
Alimony can be discussed in two parts - interim maintenance and permanent maintenance. The Income Tax Act does not contain specific provisions relating to Alimony amount received or paid.
Interim maintenance
While the legal proceedings are still under process, the husband is required to pay maintenance for the wife, along with the expenses of the proceedings. The interim maintenance is payable from the date the petition is filed, till the time the final order is passed. As per one of the recent Supreme Court judgements, 25% of husband’s salary will be proper to be given as maintenance to the ex-wife.
Alimony in the form of monthly/quarterly payouts is treated as a revenue receipt and taxed in the hands of the receiver. It is added to the receiver’s total income and taxed as per the tax bracket. Additionally, no deductions are available to the payer under the tax audit format.
Permanent maintenance
After the final verdict, the court may order the husband to pay any amount fixed by the court, either periodically, or in one go as a lump-sum payment to the wife. No income tax notification or circular or judgement is available in respect of yardstick for lump sum payments; it can range from one fifth to one-third of the husband’s net worth and is a one-time settlement.
Lump sum alimony is treated as capital receipt and hence is tax-free. There is no section in the Act exempting such an amount, but various courts have held that the amount of lump sum received as alimony is a capital receipt and thus exempt from tax.
It is advised that lump sum payments should be the prudent way forward for alimony settlements to avoid the taxman and unnecessary tax matters. Further, one can always seek professional advice while planning the taxation of alimony/maintenance receipts arising from divorce to manage funds better.

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