My wife and I want to divorce amicably. This is a one-time, complete and final settlement in addition to the monthly maintenance payment. Will these payments be taxable in their hands? Do I get any benefit from the maintenance paid to her?
There are no clear regulations regarding the taxation of the maintenance received. There are two types of maintenance: a one-time payment and ii) a recurring payment. The court may order the payment of one or both types of maintenance when issuing the divorce decree.
Since there is no special tax exemption for recurring maintenance payments, they may be taxed by the recipient. However, the one-off maintenance can be recognized as capital income and therefore not taxable at all. This is fully supported by the decision of the Bombay High Court in the case of Princess Maheshwari Devi of Pratapgarh Poona vs. CIT 147 ITR 258 where the court has concluded that a one-time maintenance payment is a transaction from which The right of the wife to receive maintenance from her ex-husband expires partially or completely. The lump sum maintenance received is to be treated as capital income and is therefore not taxable to the wife. Even if the principal is not treated as a capital inflow, it may well be received as consideration under a separate living arrangement.
Since the relationship between husband and wife would no longer exist, the clubbing provisions are not applicable in relation to the assets transferred under the divorce decree. The court had also ruled that the periodic payments could be treated as income under the divorce decree.
Please note that although the periodic payments made to your wife would be taxable in her hands, you cannot claim a deduction for payments made as part of the divorce decree.
Balwant Jain is a tax and investment expert who can be reached at jainbalwant@gmail.com and @jainbalwant on his X handle.
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