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Can Marriage and Divorce affect your tax liability?

Author: Balwant Jain/Wednesday, January 9, 2019/Categories: Exclusive

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Can Marriage and Divorce affect your tax liability?

“These days, love is a matter of chance, matrimony a matter of money and divorce a matter of course.” Helen Rowland

Income Tax laws globally recognise the incident of marriage and divorce. The Income Tax Act of India is no exception. Let us discuss how the provisions of Indian tax laws get affected by incidence of marriage and divorce.

Exemption for Gifts at marriage.

As per Section 56(2) (x), gifts received from all the sources by a person are fully exempt upto Rs 50,000 in a year in aggregate. However, once the aggregate crosses the threshold of fifty thousand rupees, all the gifts become taxable without any basic exemption. It is not that all the gifts are taxable. There are certain exceptions like the gifts received at the time of marriage are fully tax-free even if the value exceeds fifty thousand rupees in a year. However, these gifts are exempt only in the hands of the person getting married and not by other people, which is very common in the Indian society.  

A word of caution here is in order. It is advisable not to use this exemption as a tool to convert your unaccounted money in while. In case you claim receipts of huge gifts at the occasion of your marriage, whether in cash or in kind, you may be required to provide confirmations from the person from who you claim to have received these gifts, in case your ITR is selected for detailed scrutiny. You may also be required to provide details of your marriage expenses and source of such expenses. Your recorded marriage expenses have to be commensurate with the amounts of gifts claimed as received by you.

Clubbing of income to spouse

Though the gifts from your spouse are fully exempt but the income which accrues to you on the asset so gifted or purchased with the money so gifted, has to be included in the income of the spouse giving such gifts. Please note that the clubbing provisions will apply only if the marriage was subsisting when the gift was received as well as at the time of clubbing of such income.  

For example for any gift made by you to your present spouse before the marriage would not be covered and clubbed in your hand as the marriage was not subsisting when the gift was made. Even for the gifts made during the subsistence of the marriage the clubbing will cease once the marriage is dissolved either due to divorce or death of any of the spouse.

Taxation of alimony

The courts, generally, grant alimony as lump sum as well as periodical payments at the time of granting divorce. There are specific provisions under the tax laws for taxing these payments but taxability of such alimony, generally, can be determined on the basis of general taxation provisions and decisions rendered by various courts. So lump sum money received as alimony at the time of divorce is not treated as income of the recipient as it is treated as capital receipt. Moreover, this money is said to be received in consideration of an agreement to live apart and thus goes out of clutches of Section 56(2) (x) too.

As far as the periodic payment of alimony is concerned the same may become taxable as the same cannot be treated as capital receipt by the recipient. It is interesting to note that as per the Indian Income Tax laws there is no tax benefits available in respect of the alimony paid, to the person who has to pay it.

Clubbing of minor’s income

Any income earned by a minor in a year above Rs 1500 is required to be added to the income of the parent with higher return till the marriage subsists. The clubbing provisions do not apply in respect of the income earned by the minor due to his own skills, talent or personal efforts. Likewise income accruing and earned by a minor suffering from any specified physical disabilities is also out of the clubbing provisions.

It is important to note that once income of the minor is clubbed with a parent it is required to be continuously clubbed with the same parents till the assessing officer directs it to be clubbed with other parent’s income.

In case of divorce the income of the minor shall be clubbed with the income of the parent who is maintaining such minor during the year. So in cases of judicial custody where the custody of a child is changed, the clubbing will also get changed depending on the parent maintaining the minor.

The author is a tax and investment expert and can be reached on jainbalwant@gmail.com

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