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Preplanning the nitty-gritty of Taxation and Financial Planning Aspects of Divorce.

A Holistic Perspective

Divorce is a process involving elaborate legal procedures costing time, money, and emotional challenges. Becoming aware of these taxing procedures in advance before initiating the legal procedure of divorce will ease the inevitable difficulty of the divorce procedure. Observing the various dimensional impact of divorce, we can find that there is an element of financial consequences for both parties irrespective of the type of divorce (voluntary or with dispute) thought. The financial and other consequences of divorce will be much more for couples with children than couples without children. In the case of couples with children, the matter of maintenance of children can potentially be a matter of long disputes, and the final verdict will be of the family court.


When two individuals come together as a couple, they often combine their financial resources, which can include various assets and liabilities. These can be acquired both before and during their relationship. Determining the value of the assets and liabilities held by couples, whether individually or jointly, through valuation is highly relevant. It's important to note that the specific assets and liabilities a couple possesses can vary greatly depending on their financial circumstances and choices. Inherited assets and gifts received from relatives and gifts exchanged between couples may have more emotional value, which may positively or negatively impact the dispute. In such a scenario, an objective discussion in the presence of an impartial well-wisher or mediator is recommended. Determining the real owner, real source, and real value for separating assets and liabilities in a couple's situation can be a complex process that involves legal considerations and may vary depending on the jurisdiction. The real owner of an asset or liability is typically determined based on legal ownership. In most cases, assets and liabilities acquired before the marriage are considered separate property and belong to the individual who acquired them. On the other hand, assets and liabilities acquired during the marriage are often considered marital or community property, depending on the jurisdiction. The real source of an asset or liability refers to the origin of the property or the funds used to acquire it. It is crucial to establish a clear record of the source of each asset or liability, especially when determining its ownership and value. Documentation such as purchase receipts, loan agreements, and financial statements can help identify the real source. Determining the real value of assets and liabilities involves assessing their fair market value, which is the price they would likely fetch in an open market.


The family court will determine maintenance charges for couples with children and, in certain instances, decide the allocation to the wife or husband, taking into consideration the various parameters which are statutorily fixed. Maintenance, alternatively referred to as alimony, is a legally binding responsibility where an individual is obligated to offer financial assistance to their former spouse following a divorce or separation. For a court to approve maintenance, certain vital criteria must be satisfied. These criteria encompass the income and expenses of both parties, their standard of living and status during the marriage, and their individual needs and obligations, including their income, earning capacity, age, health, and other relevant factors. It is crucial to acknowledge that every case is evaluated on its unique merits. The court carefully examines each case independently, taking into account multiple factors before reaching a decision. Either spouse can potentially qualify for maintenance, although it is typically granted to the spouse with a lower income or the spouse who faces financial challenges in sustaining themselves.


In a recent ruling of Bhagyashri v Jagdish [Writ Petition Number 2527 of 2021][1], the Bombay High Court (HC) upheld the judgment of a lower court, which awarded 'maintenance pendente lite' and permanent alimony to the ex-husband. Additionally, the court observed that Section 25 of the Hindu Marriage Act, 1955 allows the court to issue a maintenance order either at the time of decree or at any subsequent point, emphasizing that the interpretation of the term "wife or husband" should not be limited in a way that renders the provisions ineffective. The Bombay High Court (HC) further highlighted that these provisions are gender-neutral, enabling either spouse to invoke them.


Is maintenance/Alimony taxable?

In general, maintenance payments are considered taxable income for the recipient and tax-deductible for the paying spouse, although the specific tax implications can vary depending on the circumstances of the case and the jurisdiction. Lump sum alimony received as part of a court decree is typically exempt from income tax, while regular payments of permanent alimony are taxable. If there is a minor child involved, the maintenance amount received for the child's support will be clubbed with the income of the parent who has custody, as per Section 64(1A) of the Income Tax Act, 1961[2]. Under this provision, the minor child's income is attributed to the parent, and an exemption of Rs. 1,500 is allowed to that parent yearly.


If a transfer of capital assets occurs between the filing of the divorce petition and the issuance of the final decree of divorce, it can have capital gains tax implications for both parties, depending on the ownership status at the time of transfer. However, it is important to note that if either party has obtained an injunction prohibiting the transfer of such capital assets, the tax impact may be different. In the case of property sales before the finalization of the divorce, capital gains tax becomes a factor. If such a transfer is happening in the same financial year in which the final divorce decree is passed, the tax impact on that capital asset will be impacted based on the way the ownership of that capital asset or the right of ownership of the consideration received of the transfer is fixed in that divorce decree.


An Intriguing Trend

The Divorce process is a psychologically challenging endeavour. Internationally a lot of research is going on discovering the negative psychological and health impact the parties to divorce encounter in the various phases of the divorce process. Recently a personality disorder has been identified as one of the biggest causes of marital failure leading to divorce, mainly narcissistic personality disorder (NPD). An American diagnostic manual identified nine symptoms for this, and if a person is clinically diagnosed as having NPD, 6 out of 9 symptoms are present, this personality disorder is a unique kind of personality disorder in the category of borderline personality disorder, and the abuse caused by such an individual to his spouse and children would not be understood for a very long time as it remains subtle most often. This abuse caused by Narcist is called Narcissistic abuse, and the victim's spouse usually realizes this abuse after a very long time of suffering critical emotional trauma due to the co-dependency in the relationship, and the decision to divorce will also emerge after a long time of this realization, psychologically victim will be in a cognitive dissonance coupled with the stock home syndrome. Here the narcissistic spouse is an expert in manipulating the perception (gas lighting[3] as is named by a psychologist) of others who will outsmart the victim during the court procedures staying himself the victim card. In such a scenario, the real victim spouse's condition will be pathetic in an exponential way; internationally, a new paradigm of holistic legal practice is emerging to support the victim party in a dispute giving him or her needed emotional and professional psychological support. In India, the law of fraternity is yet to appropriately understand the chaos created by narcissistic individuals in the legal system during the justice delivery process.

Exploring Financial Resources: Assets, Liabilities, and Key Considerations for Separation.


(a) Land

Land Ownership is maintained either individually or jointly by the husband and wife, and if both parties have made contributions towards the acquisition of the property, the court will allocate the property based on its market value and distribute it proportionately according to their respective contributions. If a spouse registers and purchases a property, it remains exclusively theirs even after the marriage ends, with no claim possible by the other party. This approach alleviates tension between the couple regarding property division and facilitates a mutually agreeable settlement for both parties.


(b) Building

When distributing rights to a building, it is essential to consider additional crucial factors. For instance, there may be other individuals who rely on the building for shelter, apart from the divorcing parties, and their needs must be taken into account as well.

(c) Vehicles

If the car was received as a gift or inherited, it typically falls under your separate property. However, if you inherited the car, but the title is in your spouse's name, it might be considered marital property. The situation becomes more intricate if you own multiple cars, a collection of vehicles, or antique collector cars. In such cases, you may need to make decisions on whether to sell the antique collection and divide the proceeds or choose to keep the collection intact.


(d)Gold and other personal effects, including art collection

Gold is available in different forms today, including electronic and physical. When a spouse claims gold ornaments, she will need to provide evidence of the entrusted ownership of those ornaments. When it comes to dividing an art collection, the first step is to establish ownership. If the collection was acquired before the marriage, it is typically regarded as separate property and may not be subject to division. However, if the collection was obtained during the marriage, it is generally considered marital property and subject to division. In cases where both parties wish to retain certain artworks, they can devise a mutually agreed-upon plan to divide the collection accordingly. The settlement of gold and its handover should be based on verifying the source and investment made; this ensures a fair and transparent process in determining the rightful owner and facilitates a smooth transfer of the gold accordingly.


(e) Investments in capital commodity & money market and the fixed deposit held jointly.

During the investment division phase of your divorce, the capital commodity and money market encompass various assets such as shares, mutual funds, currencies, derivatives, precious metals like gold and silver, commodities like crude oil, and more. It's important to note that your assets will be classified as separate or marital property. Stocks that you purchased before your marriage will remain your separate property. Compared to other physical assets changing the ownership and distributing the rights in these assets are relatively easy by approaching the appropriate platform through which these are bought. Almost all these transactions happen through dematerialized platforms, so transferring from a joint account to an independent single account as part of separation is a hassle-free process.


(f) Joint bank accounts

When it comes to bank accounts, keep your emotion away and make the bank accounts single and independent from ab initio. The times are changing; none of the spouses are as trustworthy and faithful as to hold a joint account as it was in the pre-liberalization era.


(g ) Nomination & Will deed

To ensure a smooth transition during separation, it is necessary to update the nomination details for all financial assets, including registered mutual funds, investments, insurance policies, bank accounts, lockers, and other investments, by submitting fresh Nomination forms. It is important to note that a nominee is considered a trustee by law. Therefore, the nomination should be supported by a proper will Deed to provide a legally binding document for the intended distribution of assets. There can be an overriding will deed from the parents of disputed couples overriding the existing plans, therefore should plan accordingly. It is better to cancel the registered will deed and prepare a new will deed by listing both moveable and immovable assets and liabilities to a beneficiary other than the disputed spouse.


(h) Remove the name of the spouse from Passport, Aadhar & Ration card

It is required to remove the name of the spouse from Passport & Ration card. Generally, a woman adds her husband’s title to her name after marriage. Even though it is not mandatory, the addition of a title to the name is quite prevalent. When it comes to separation, she needs to visit a nearby Aadhaar Enrolment Centre and provide the Aadhaar number along with document proof to the executive to fill and submit the Aadhaar Card Correction/Update Form to the authority.


(i) Utilities: Gas connection / LPG connection/ water connection/electricity connection/ Internet connection etc.

When it comes to utility connections for domestic needs, it is commonly registered under either spouse's name. However, in the event of separation, necessary changes should be made by obtaining consent for transfer or a no-objection certificate.


(j) Locker:

In the case of a Joint bank locker, both of them must visit the concerned bank and submit an application for closure. This process involves signing the bank ledger as well.


(k)Change of nominee with employer

It is a common practice by employers to collect dependent details of an employee and document it appropriately to give dependent benefits if such an eventuality emerges in the future. To identify a document that authenticates the marital status of an employee, the employer used to collect a copy of the marriage certificate from the employee after due verification with the original. At the juncture of separation with the spouse of the employee, such a dependent nominee needs to be changed.


(l) Fixed assets

There are three options available for the distribution of Land & Buildings. Whether it is a sale or transfer, the preparation of title deeds and registration is mandatory, for which both of them should approach the jurisdiction sub-registrar office.


Option 1) Disposal by open sale and distribution of the residue directly proportionate to the investment made by the parties.


Option2) The fixed assets will undergo a valuation process, and subsequently, one of the individuals will have the opportunity to take over ownership of the assets by executing a fresh fixed assets document in favour of one (husband/ wife) and settlement of the value arrived according to the investment made by husband & wife.


Option 3) Alternatively, the spouses can share ownership of the same fixed asset and register the proportionate ownership separately on each spouse's need. For Example, a two-story building is equally shared by both parties.


(m) Liabilities

A settlement agreement can bring more control over how you and your spouse will handle your debts rather than having a judge make the decisions for you. Opting for a settlement will typically result in saving considerable time, reducing anxiety, and minimizing legal expenses. In the case of joint Borrowings like housing loans, personal loans, or executed guarantees, if any, either close the borrowing account by way of settlement with the lender or transfer the whole liability to any one of them or proportionately.


Business undertakings or firms jointly owned by husband and wife should adhere to accounting rules and record assets and liabilities accordingly. In the event of separation or transfer of ownership, the assets and liabilities should be either transferred to one person or settled based on the investments made by each party.


It is advisable to verify if there are any pending litigations, either as a petitioner or as the opposite party, with the court, tribunal, or quasi-jurisdictional bodies that may involve contingent liabilities. In such cases, it is recommended that both parties submit a police clearance certificate for each transfer. This ensures a thorough assessment of any potential legal implications before proceeding with the transfers.


Conclusion

All the financial settlements should be planned before the divorce decree. Otherwise, after divorce, separated husband & wife need to visit various offices several times for documentation. In practical terms, accomplishing this task can indeed be quite challenging.


Mercy Daviz

The author is CS final exam qualified and undergoing a mandatory training program.


[1] Bhagyashri v Jagdish [Writ Petition Number 2527 of 2021], the Bombay High Court (HC) [2] Section 64(1A) of the Income Tax Act, 1961 [3] Glossary of Narcissistic personality disorder

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