How marriage and divorce affect your tax liability

Both marriage and divorce impact your tax liability. Let us discuss how you will get impacted.

Like marriage gifts, gifts received from certain specified relatives including your spouse are not treated as income under the Indian tax laws.

“Matrimony is a process by which a grocer acquired an account the florist had.” – Francis Rodman

Income tax laws around the world recognise the incidence of marriage and divorce, and Indian tax laws are not an exception. Both the incidences impact your tax liability.

Let us discuss how Indian tax laws affect your tax liability.

Treatment of gifts received at the time of marriage

Let us start with marriage. As per the Indian tax laws, as long as the aggregate of all the gifts received from all the sources during the year does not exceed Rs 50,000/- in a year, the same is not treated as your income. However once the aggregate value of all the gifts received during the year exceeds this magic number, the whole of amount is treated as your income and taxed. There are, however, certain exceptions to this rule for taxing gifts. One of the exceptions is for gifts received by the bride and the groom at the time of their marriage. So, gifts received at one’s own marriage are not treated as income of the individual irrespective of the aggregate amount of the gifts received.

Since the gifts received by the bride and the groom only are exempt, any gift received by any of their relatives gets taxed in their hands fully in case the aggregate value of all gifts receiving exceeds Rs 50,000 in a year.

A word of caution though — before you contemplate using the occasion of a marriage in the family as a tool to convert your unaccounted money in white money, please be aware that in case you show significant amount as gifts received at the occasion of marriage, the tax authorities may ask you to furnish the details of expenses incurred on various functions of the marriage and source of such expenses. The tax authorities may even ask you to produce photographs and videos of various functions of the marriage to estimate the level of celebration. The marriage expenses recorded in your books of accounts have to be commensurate with the amounts of gifts claimed as received by you.

Moreover, in case a substantial amount is claimed to have been received as gifts, you may have to establish the identity and financial strength of the person giving the gifts. If you fail to establish genuineness of the gifts received, the same may be taxed at the flat rate of 60%. The interest and penalty will come as bonus.

Clubbing of income for gifts given to spouse

Like marriage gifts, gifts received from certain specified relatives including your spouse are not to be treated as income under the Indian tax laws. But by giving gifts to your spouse which are tax-exempt, you cannot reduce your tax outgo as any income arising to the spouse from the gifted amount gets clubbed with your income. The same rule about exemption and clubbing apply in respect of gifts received by the bride from her father in law and mother in law. The clubbing provisions will continue to apply even when the asset it converted into any other assets. One solace here. The clubbing provisions do not apply on the income earned on the investments made with the income which has already been clubbed. The clubbing provisions will continue to apply as long as the marriage subsists and will cease to apply once the marriage is dissolved either due to divorce or death of any of the spouses.

Clubbing of minor’s income

As per the present tax laws, any income earned by your minor child is required to be clubbed with the income of the parent whose income is higher. Once the minor’s income gets clubbed with a particular parent, it will continue to get clubbed for subsequent years even if the income of such parent becomes lower than the other parent. However, the assessing office may direct the clubbing to be changed from one parent to other parents in case of relative change in the income levels of the parents.

Please note that you are entitled to claim an exemption of upto Rs 1,500/- in respect of each child for every year and it is the excess income which will get clubbed.

It is not that all the income of your child is required to be clubbed. The clubbing provisions apply only to the passive income like interest, rent, dividends, capital gains etc. and do not apply to the income earned by the minor by using own skills, talent or personal efforts. So, the clubbing provisions will not apply to child artists or even to child labour.

The clubbing provisions do not apply to income accruing to and earned by a minor suffering from any specified physical disabilities. In case of separation of parents, the income of the minor shall be clubbed with that 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.

Taxation of alimony

In case of divorce, the courts, generally, grant lump sum alimony as well as periodical payments in case alimony is demanded. There are no specific provisions in the Indian tax laws dealing with tax treatment of such receipts. So, taxability of alimony can be determined on the basis of general taxation rules and various decisions rendered by judiciary from time to time. Lump sum alimony received is not treated as income as it is treated as capital receipt because it is said to be received in consideration of an agreement to release each other from the bond of marriage. However, periodic payments may become taxable as it cannot be treated as capital receipt. It is interesting to note that Indian tax laws do not extend any tax benefit to the person paying such alimony whether lump sum or periodic.

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

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

Most Read In Income Tax
Photos