Regular maintenance paid to ex-wife is taxable

But, there is no tax on lump sum alimony or transfer of physical assets

For married couples, life is easy as far as taxation goes. If financial or physical assets are transferred from husband to wife or vice versa, there is the clubbing provision of the Income-Tax Act that covers such transactions. But, things tend to get complicated when the couple get divorced. 

“Of late, the funds and assets that exchange hands during a divorce have gone up significantly. Couples are, therefore, trying to ensure that the money and assets transferred attract lowest possible tax,” says Vandana Shah, a lawyer who specialises in divorce cases and is also the founder of the app DivorceKart.

As funds or assets transferred during alimony don’t attract any tax, the husband transfers a significant chunk of the payout as alimony. “The lump sum paid as alimony is considered as capital receipt and therefore does not attract any tax,” says Naveen Wadhwa, general manager, Taxmann.com. The twist in the tale is that if the money is invested and there is income earned on it, there will be a tax on it. 

Things are quite different if the husband is paying regular maintenance. The estranged wife has to pay tax on it depending on her income tax slab. The courts have ruled that regular maintenance money has to be considered as revenue receipt and should be taxed. Though the money gets taxed twice — first the husband pays tax on it and then the wife — there’s no deduction available to the husband under the tax laws.

Physical assets are also treated differently. While the transfer of assets such as a house doesn’t attract tax but it can get complicated if the wife decides to sell it. On selling of assets such as property, an individual needs to pay capital gains tax and to calculate this, the price of purchase and holding period are essential. In this case, there’s ambiguity whether the wife can consider the buying price that her husband paid, fair market value when it was transferred to her or should the price be zero as she got it free of cost. “There is no precedence available in such a case. It will, therefore, depend on the view of the assessing officer,” says Kuldip Kumar, partner and leader, personal tax, PwC India. Kumar says the wife, in this case, will need to take a view and defend it in case the assessing officer differs. If the cost of acquisition is zero, the capital gains tax will be higher. Some tax experts say that the wife can consider the fair market value as during the divorce settlement, there would be a value attached to the property given as alimony.

Like there’s ambiguity in calculation of capital gains of assets, it’s also not clear whether a husband can claim a tax deduction if he pays the tuition fee of his children or invests in their name while the wife has the custody. “While the wife may have custody of children, the husband legally continues to be their father. He should, therefore, get a deduction,” says Wadhwa.