Lump Sum Settlement Money received at time of Divorce or Monthly Alimony Money received is Taxable in Income Tax Law?
A divorce is the legal termination of a marriage by a court in a legal proceeding, requiring a petition or complaint for divorce (or dissolution in some states) by one party. There are two types of divorce– fault and no-fault. A fault divorce is a judicial termination of a marriage based on marital misconduct or other statutory cause requiring proof in a court of law by the divorcing party that the divorcee had done one of several enumerated things as sufficient grounds for the divorce.
A no-fault divorce is one in which neither party is required to prove fault, and one party must allege and testify only that either irretrievable breakdown of the marriage or irreconcilable differences between the parties makes termination of the marriage appropriate
When divorce is final, assets change hands between husband & wife. It is important to understand what part of the settlement is taxable and to what party.
Now Question arise, in the case of alimony, the amount is taxable or not to the person who receives it on monthly basis or lumps sum & the person who paid it can claim deduction for it or not.
First of all understand the meaning of 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
The Income Tax Act does not contain specific provisions relating to Alimony. Income tax provisions along with relevant case laws must be studied for taxation of alimony.
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.
In the case of ACIT vs Meenakshi Khanna (ITAT Delhi) wherein on dated 01.12.1989 the agreement for custody, separation and divorce was entered into & the divorce finally taking place on 20.04.1990 and money pursuant to this agreement was agreed to be paid in monthly instalments by the husband, which he did not honour (as per agreement), on which the wife threatened to take legal action against husband resulting in a one-time settlement by him to her. (Amount as per Agreement)
The Tribunal held this one-time payment, though delayed, as a lump sum payment relating to the divorce agreement and not taxable in the hands of the recipient (wife).
Therefore, it is clear from the above that a lump-sum receipt in the form of Alimony will not be taxable in the hands of the recipient. Whereas, monthly alimony payments will be treated as income in the hands of the recipient.
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
So as per my views :-
1) The amount of lump sum received as permanent alimony on account of divorce is not taxable. It is considered to be a capital receipt and, therefore, the provisions of Income-tax Act 1961 (The Act) are not applicable. So , the amount of permanent alimony is not treated as income and thus not taxable..
2)Monthly alimony payments will be treated as income in the hands of the recipient
In return, the person paying the alimony, there is no provision under the tax laws enabling him to claim a deduction towards such payment from his income.
Some Case Laws-
Shrimati Roma Sengupta Vs. CIT (Calcutta High Court) –Lump sum alimony is a capital receipt and therefore not taxable
ACIT Vs Meenakshi Khanna (ITAT Delhi) –Lump sum amount received from ex-husband as alimony is not taxable
Prema G. Sanghvi Vs. ITO (ITAT Mumbai) –Receipt of alimony from ex-husband is nothing but Gift and is exempt