Marriage and divorce tax rules: Gifts, clubbing, and alimony explained

“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; Indian tax laws are no exception. Both incidents impact your tax liability. Let us discuss how Indian tax laws affect your tax liability.

Treatment of gifts received at the time of marriage

So 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 whole of the amount is treated as your income and taxed.

There are 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 to be treated as income of the individual, irrespective of the aggregate amount of the gifts received.

Since the gifts received by the bride and groom only are exempt, any gifts received by any of their relatives are taxed in their hands fully in case the aggregate value of all gifts received exceeds fifty thousand rupees in a year.

A word of caution, 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 claim 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 video 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 substantial amounts are 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 the genuineness of the gifts received, the same may be taxed at the flat rate of 60%. The interest and penalty will come as a bonus.

Clubbing of income for gifts made to the 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 making gifts to your spouse, which are tax exempt, you cannot reduce your tax outgo, as any income arising to your spouse from the gifted amount gets clubbed with your income.

The same rule about exemption and clubbing applies 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 is converted into any other assets. One solace here. The clubbing provisions do not apply to 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 the death of either spouse.

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 another parent in case of a relative change in the income levels of the parents.

Please note that you are entitled to claim an exemption of up to Rs. 1,500/- in respect of each child for every year, and it is the excess income which will only 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 income earned by the minor by using their 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 income of the minor shall be clubbed with 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 change 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 the tax treatment of such receipts. So taxability of alimony can be determined on the basis of general taxation rules and various decisions rendered by the judiciary from time to time.

Lump sum alimony received is not treated as income, as it is treated as a 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 they cannot be treated as a 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.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on Twitter