In December 2015, I wrote a blog titled ‘Notes from Father of the Bride’. It was a rudimentary primer for the father and mother of the bride on the dos and don’ts of organising a wedding. This was based on our experience gleaned from our daughter’s wedding which had taken place place a month earlier. Since then, I have been flooded with queries, especially regarding taxation of the various facets of this delightful institution. Some have even raised questions (unfortunate souls, these) about the taxability of divorce settlements.
So here’s a list of FAQs which address the concerns.
How Much Is Too Much as a Wedding Gift?
First the law. Gifts are taxable – fully in the case of money gifts (if the aggregate amount is more than Rs 50,000); fully for gifts in kind (if the market value exceeds Rs 50,000); and fully for immovable property (if the stamp duty value exceeds Rs 50,000). However, gifts in money or kind or immovable property received by an individual are tax-free in certain situations but two such situations are relevant to this discussion. The first – if received from a relative; no occasion is necessary. The second – if received on the occasion of the marriage of the individual. In the latter case, gifts need not be given by relatives alone. Anybody can gift – relative, friend, colleague, business associate, others. So that’s good news.
So, the first issue many are concerned with is – if the parents receive money gifts (cash or cheque) on the occasion of the marriage of their child and decide to retain the gifts, are there any tax consequences? Many parents do that to partly recoup the marriage expenses, so one is not going to be judgmental (we handed over everything to our daughter).
I am afraid if the money gifts total more than Rs 50,000, it will be taxed in the hands of either of the parents, depending on whose name appears on the cheques, and who the cash is handed over to. The law, supported by court judgments, is very clear – only an individual who is getting married can receive a money gift that is tax-free. The expression ‘marriage of the individual’ is unambiguous in its intent and does not admit money gifts received by the parents on the marriage of their child. If the law had intended to include the parents as well, the necessary words would have been added.
If the parents receive the money gifts and hand it over to the child, either directly (in the case of cash) or after depositing it in their bank account and then transferring it to the child, then the parents will not be taxed.
What about gifts in kind retained by the parents? It’s again taxable if its market value exceeds Rs 50,000. Say, the father receives a gift valued at Rs 1 lakh and decides to use it himself; the entire amount would be taxable. Of course, if the child getting married receives it, it is tax-free. If the parents transfer it to the child, then no tax would be payable by them.
How about gifts received, not on the date of the marriage ceremony, but prior to it, say at the time of the sangeet or the mehndi?
The courts have held that if the gift is associated with the event of marriage or if the reason or immediate cause for the gift is the marriage, it will be covered by the expression ‘on the occasion of the marriage’. The relationship between the gift and the marriage is, thus, the relevant factor and not the time of making the gift. The expression ‘on the occasion of marriage’ does not mean ‘on the day of marriage’. Hence, gifts received in the ceremonies prior to the marriage, which ceremonies are linked to it, will be tax exempt.
What if gifts are given after the marriage, say the next day at the time of bidaai? The courts have held that the expression ‘on the occasion of marriage’ means not only the ceremonies of the marriage proper but also the ceremonies after the marriage before the bride and the bridegroom leave the bride’s home. In fact, the courts have generally held that even gifts given several years later are exempt if you can satisfactorily prove that a promise had been made to make a gift at the time of marriage, and that due to some good and sufficient reason, the gift could not be given.
Gifts at the time of betrothal? Alas, they are not tax-free! Courts have held that betrothal is not part and parcel of marriage. Marriage and betrothal are two different institutions. Betrothal, no doubt, is a step towards marriage but it is merely a means while marriage is the end. Of course, as stated before, the gifts received from relatives are tax-free on all events, including betrothal. But what happens if the prospective mother-in-law wants to gift her prospective bahu with cash or jewellery. Unfortunately, it is taxable. Before solemnisation of the marriage, there is no relationship between the two.
Even though the word ‘relative’ has been defined widely in the Income Tax Act, it does not include a prospective relative. Therefore, a gift to the future daughter-in-law is taxable in the daughter’s-in-law hand (assuming its value is more than Rs 50,000).
In all the above cases, it is imperative that the gift be commensurate with the donor’s financial status and his relationship with the bride/bridegroom or the family. If a driver were to gift Rs 1,11,000, it would raise a red flag. Similarly, some stranger, even though financially sound, giving a huge gift could spell trouble. Some unscrupulous parents use the occasion of marriage to convert their black money into white through bogus gifts. The law has become very strict in these matters and the consequences are harsh.
It is also important that a list of donors with all their details be prepared meticulously. This list will be useful if the tax authorities investigate. Also, the list helps you when the time comes to reciprocate.
Also, the gifts need to be voluntary. Any demand for gifts as a pre-requisite for the wedding to take place would attract the anti-dowry laws. Tax would then be the least of the problems for the groom and his parents.
What If Things Go South?
While we pray that all marriages last till death do us part, divorce is a reality. As if the suffering to the couple is not enough, there is the tax element lurking in the shadows which must be contended with.
So, say, the wife receives alimony on divorce – alimony can be a one-time receipt or a periodic receipt or a combination of both. Generally, it has been held by the courts that the lump sum payment received is a capital receipt and, hence, not taxable. The reasoning is that it is not a gift. In the case of divorce, the quid pro quo for the lump sum payment is the dissolution of marriage. Such a payment cannot, therefore, be said to be a gift, hence it is tax exempt.
However, unfortunately, the monthly alimony, being a regular and periodic return from a divorce decree, has been held to be taxable income. That is unfair because the underlying principle in the two situations being identical, the sums received in instalments should also be exempt. There seems to be no rationale for drawing such distinction. Moreover, a monthly amount paid to a former spouse is for her maintenance and is not her income. It is a personal receipt, not in the nature of income.
Ironically, if, instead of paying the monthly alimony, the former husband had merely borne certain expenses, such as the cost of school fees of the children, or the rent of the house, or other specific expenses, such amounts would not have been taxable.
For the ex-husband paying the alimony, there is no provision enabling him to claim a deduction towards such payment from his income.
How about assets? Just like the lump sum alimony payment, a one-time receipt of assets arising under the terms of the divorce would be a capital receipt, and not taxable.
Here, I would hasten to add that alimony flowing from ‘him’ to ‘her’ is just by way of an example. It can be the other way around too.
What were to happen if the ex-husband, after the divorce, voluntarily gifts property to his ex -wife which was not the subject matter of the marriage settlement. The law provides that any asset transferred to the wife by the husband is tax-free in the hands of the wife. However, after divorce, any asset transferred to the former wife, would be a gift from a non-relative and would have tax implications for her.
That’s not all. Any income from the assets gifted prior to divorce are clubbed with the income of the husband till the marriage exists. After divorce, any subsequent income from these assets would be taxable in the hands of the former wife. Chalo ik baar phir se ajnabi ban jayen hum dono (come let’s be strangers again), as the iconic song goes, jolts the parting couple both emotionally and financially.
So, all in all, not too bad. In his song ‘Taxman’, George Harrison tells us how it will be. “There’s one for you, nineteen for me,” he warns. In the case of weddings and divorces, I would perhaps keep it to fifteen for you, five for the taxman.
(Ajay Mankotia is a former IRS officer presently working in a media company. This is a personal opinion and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
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