Considering for a divorce triggers a lot of consequential impacts from various transactions. For instance transferring of assets to spouse, alimony payment, etc. Letโs look at the various transactions which has an impact on tax.
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. Usually, a capital receipt is non-taxable while a revenue receipt is taxable.
In an old Mumbai High Court ruling, periodic return such as monthly alimony money would constitute taxable income. In contrast, the lump sum payment of alimony money was held to be a capital receipt and hence, not taxable for the former spouse. This decision was relating to the cash payments and does not involve 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
Transfer of asset without the consideration of spouse till the marriage exists, is tax-free in the hands of the recipient as per Section 56(2) (vii) of the Act.
However, any asset transferred after divorce would be a treated as 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.) will be taxable for the recipient at the time of divorce, if the asset’s fair market value is more than Rs.50,000. 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 of, 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 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.
Source : Business today, March 2013.