KPMG India Tax Partner Parizad Sirwalla
Breaking apart from your spouse triggers a lot of levers
and gears into action. Among other aspects of divorce, you need to be aware of the tax impact of related transactions, for example distribution of assets and alimony payment.Alimony
Alimony can be a one-time receipt or a periodic receipt or a combination of both. It is not specifically covered in 'income' as defined under the Income Tax Act, 1961 ('the Act') and there is no specific provision which governs its taxability.
As a general principle, a capital receipt is non-taxable while a revenue receipt is taxable
. In an old Mumbai High Court ruling, it was held that monthly alimony, being a regular and periodic return from a decree, would constitute taxable income. In contrast, the lump sum payment received was held to be a capital receipt and, hence, not taxable for the former spouse. This decision was in the context of cash payments and does not deal with assets transferred as a part of the separation.
For the spouse paying the alimony, there is no provision under the tax laws enabling him to claim a deduction towards such payment from his income.Transfer of Assets
Any asset transferred without consideration to spouse
till the marriage exists, is tax-free in the hands of the recipient as per Section 56(2)(vii) of the Act.
However, after divorce, any asset transferred to the former spouse without consideration, would be a gift from a non-relative and would have tax implications for the recipient spouse.
In case of transfer of assets other than immovable properties (such as securities, jewellery, etc), if the asset's fair market value is more than Rs 50,000, the entire value at the time of transfer will be taxable for the recipient. Where such an asset is received for some consideration lower than the fair value by more than Rs 50,000, the difference is taxable. In case of transfer of an immovable property, if its stamp duty value is more than Rs 50,000, the entire value will be taxable for the recipient. Rules have been prescribed to arrive at such values.Income from Assets
Any income from the assets gifted prior to divorce could be clubbed with the income of transferring spouse
till the marriage exists. After divorce, any subsequent income from these assets would be taxable in the hands of the recipient spouse.
There is no specific provision in the Act for tax implications on sale of assets acquired at the time of divorce. As a general rule, any asset when sold is subject to capital gains tax. 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 the gain and its taxation. The cost of acquisition is deemed to be the cost at which the previous owner bought it.Wealth Tax
Impact on wealth tax liability should also be evaluated. Clubbing provisions similar to income also apply in the case of wealth tax till the marriage exists. An asset that has been transferred to spouse without consideration deemed to belong to the transferor spouse till the marriage exists. After separation, the assets would be included in the net wealth of the recipient ex-spouse.PARIZAD SIRWALLA
Partner, Tax, KPMG India