In life, only two things are certain: death and taxes. Divorce proceedings are always emotionally and financially taxing, and losing a spouse is undoubtedly one of life’s most painful and distressing experiences. These emotional challenges also come with financial implications, making it crucial for women caught in these situations to understand the financial nuances involved. This is crucial for their future well-being.
Alimony, often referred to as spousal support or maintenance, is a regular one-time payment or a combination of both made by a husband to his wife following a divorce or separation governed by the Hindu Marriage Act 1955. While these payments provide essential financial support, they also have implications for taxes. It's essential for women receiving alimony to comprehend how these payments are taxed and how they can effectively manage their tax liabilities.
The Income Tax Act 1961 does not provide for any specific section related to the taxation of alimony; therefore, the taxation of alimony is to be decided based on various case laws. As a general principle, capital receipts are non-taxable, and revenue receipts are taxable. It is therefore imperative to comprehend how taxation works in different cases of alimony.
Lump Sum Alimony Taxability: Lump Sum Alimony is treated as a capital receipt, and therefore, such receipts will not be taxable under the Income Tax Act 1961. Even if the same is not considered as a capital receipt, since it is received for consideration under an agreement to live apart, it will not be taxable.
Regular/Recurring Alimony Taxability: Recurring Alimony is considered a revenue receipt; therefore, tax will be levied on such payments in the hands of the recipient. It’s vital to report such income in the income tax return and pay taxes at the applicable slab rate. Failure to do so may attract notice from the income tax department and may lead to interest and penalties. The income earned by investing alimony received shall be taxable in the hands of the wife and will not be clubbed with the husband’s income since clubbing provisions are not applicable in the case of alimony, as the husband-wife relationship does not exist anymore.
When it comes to the taxation of insurance proceeds received after the loss of a husband, the Income Tax Act 1961 is very clear with respect to taxability. Investing in life insurance is essential, particularly if your family relies on your income for their livelihood. Even if your spouse contributes financially, ensuring coverage for your life is prudent. While it can't replace the emotional void, it provides financial stability for your loved ones.
As per section 10(10D) of the Act, if the premium paid does not exceed 10% of the sum assured for policies issued after 2012 and 20% for policies issued before April 1, 2012, any sum received on maturity is fully exempt, and any bonus received will be totally tax-exempt. However, one definitely needs to show this amount in the Income Tax Return under exempt income as per this section. In case of the death of the insured when the nominee receives the policy amount, it will be completely tax-free even if the premium has crossed 10%/20% as the case may be in any year.
Every year, a significant number of individuals face divorce or the loss of a spouse. In these cases, it’s crucial to manage taxes to ensure stability and security amidst life’s transitions. For women, understanding the financial implications of life-altering experiences is therefore crucial.
Views are personal. The author is a chartered accountant.