Legally Invisible: How Indian Tax Law Fails Same-Sex Couples
In 1860, the British overlords of the Indian motherland decided to impose their own rules and regulations upon us in the form of the “Indian penal code”. They were already in the process of supplanting our varnashrama dharma with a “caste system” that was being rapidly institutionalized As Dr Shashi Tharoor remarks in his book “An era of Darkness”
“Caste is something we’ve all been taught to believe has been there for thousands of years and we have always practised it. But in fact the practice of caste before the British came was much more relaxed, much more fuzzy; there was much more permeability between caste and much more movement of caste up the social chain.”
“they took a system that was fluid and made it rigid. They took a system that was based on multiple identities and made it based on a single identity."
They also introduced their own Victorian era prudery and decided to impose it upon the unwashed Indian masses. The buggery act of 1533 that made same sex acts a capital offence, punishable by death was sought to be imported into India and "carnal intercourse against the order of nature." was criminalized, By not explicitly naming acts, the British created a "vague" law that police could use to harass anyone whose private life didn't fit the Victorian, judeo-Chistian ideal.
Even after we got independence our elites never bothered to look inwards and examine the standing of these laws under Indian history and tradition. It took decades of litigation by various parties for the Supreme court to acknowledge the perverse nature of Section 377. In striking down part of section 377 the court famously remarked
“History owes an apology to the members of this community... for the delay in providing redressal for the ignominy and ostracism they have suffered through the centuries."
As it stands, Same sex relationship have been decriminalized and thus no one can be prosecuted under law for not fitting into binary western constructs. However removal of Criminal liability does not in intsefl create any positive rights as same sex couples who were getting habituated to this new normal soon discovered.
Supriyos Case
As Queer couples sought to walk the progression from the right to be with someone to actually marry the person of their choice. A right that has not been baked into any of the acts that govern the sacred institution of marriage in India. The courts famously ruled in the case of Supriyo @ Supriya Chakraborty & Anr. v. Union of India that the constitution of India does not guarantee a fundamental right to marry. They clarified that while there is a right to choose a partner and cohabit, marriage itself is a "statutory institution", a creation of the law and not an inherent constitutional right. The petitioners in this case prayed to the court to "read down" the gendered language of the Special Marriages Act (SMA) by replacing the term "husband/wife" with "spouse". The bench unanimously refused, stating that doing so would effectively be "judicial legislation." The court argued that the SMA was specifically intended by Parliament for heterosexual couples, and changing its core structure was a job for the legislature and not the court.
You have read this far and you are wondering, this is a note on taxation of same sex couples and the authors are tax consultants, what does this history lesson and right to marry have anything to do with issues that queer couples may face?
This background is extremely necessary for us to examine the practical issues that emerge and are faced by these couples.
The concept of Spouse.
The income tax act 1961 is liberal in the sense it uses the gender neutral term “Spouse” as against husband/wife. It however falls short and does not define the word "spouse" anywhere in its definitions section. It defines a "relative" in relation to an individual to include the "husband" or "wife". A relative is defined more elaborately as :
· The husband or wife;
· brother or sister; or
· Any lineal ascendant or descendant of that individual
A spouse for the income tax act therefore can be best understood to refer to a partner in a validly wedded relationship recognised by law. In India marriages are recognized under Hindu Marriage Act, Special Marriage Act, Muslim Personal Law, Indian Christian Marriage Act, Parsi Marriage and Divorce Act, none of these acts have any mechanism in order to recognize a same sex wedding.
In the absence of a cogent definition in the act we are left to find definitions for the word elsewhere which brings us back to Supriyo’s judgment. The impact of which is that an expanded definition of spouse cannot be read into the act without express legislative backing for the same. Indian tax law does not independently recognise marriage, it merely inherits marital status from personal and civil marriage statutes. Since all existing marriage statutes in India are explicitly heterosexual, same-sex couples are rendered legally invisible for fiscal purposes, regardless of economic interdependence.
Where it hits.
Section 64(1)(iv) provides for clubbing of incomes arising from assets transferred for inadequate consideration or without consideration. This implies that if say a rental property is transferred by one half of a same sex couple to the other then the incomes emanating from that property will be taxed only in the hands of the recipient and not the transferor.
On the other hand, the recipient of the property will have to pay taxes on the fair market value of the property under section 56(2)(X) which governs receipt of money or property without consideration unless the same has been received from a relative. As we have already noted above the definition of a relative while wide is fairly restrictive and for the purposes of this ection includes only :
· Spouse,
· Brother or sister,
· brother or sister of the spouse,
· brother or sister of either parent,
· lineal ascendants and descendants,
· spouses of the above persons.
Since spouses do not include same sex couples transfers between such couples will not fall under the category of transfers from relatives and will be taxed at applicable rates in the hands of the recipient just the same as gifts from strangers may be regardless of co-habitation or status otherwise. The definition of property for this purpose also includes money, jewellery and not just immovable property.
Question then arises if there must be alternative considerations that should be considered here? This is something that can be worked upon, alternatively these transactions could be structured as loans however tax authorities are happy to recharacterize very long term loans where no repayment or interest is envisaged as gifts and tax them accordingly.
56(2)(x) also provides for specific exclusions for gifts received on the occasion of marriage. While gifts received from “relatives” are always exempt under this section, even gifts received by the individuals from even non relatives are considered exempt and out of the ambit of taxation if received at the time of their marriage. This creates a question If marriage here would be a legally acceptable marriage or even a co-habitation arrangement after a formal ceremony would tantamount to marriage for the purpose of this section? Going by our discussion on “spouse” the tendency would be to presume that marriage should be considered as a legally valid arrangement as under the different personal marriage acts. However I am certain there would be some who would be willing to bet against this argument and take a more aggressive view.
Tax implications do not end for same sex couples even when relationships end. Under the income tax act Lump sum alimony payments have been considered capital receipts which are not in the nature of incomes and therefore outside the ambit of taxation. But since Same sex couples do not have access to matrimonial statues governing divorce, maintenance and alimony, any settlement between such couples upon the cessation of the relationship will not have the blanket exemption as it does for heterosexual couples and will have to be strictly examined from the lens of adequacy of consideration.
If adequacy cannot be established for the purpose of 56(2)(x) then the amounts received upon separation may be fully taxable in the hands of the recipient and no deduction of the same would be available to the payer as well. Whether or not lump sum monies paid/received upon separation will be considered akin to Alimony and therefore also considered a capital receipt is open to question.
Beyond these, there are a litany of smaller issues that plague same sex couples from a tax perspective. Issues that we often tend to take for granted, things as small as Joint owernship or property and payment of rent to spouses for the purposes of claiming HRA. In the absence of a technical spousal relationship same sex couples will have to face additional documentation requirements in contrast to a heterosexual couple.
The remedy?
Short of legislative changes and widening the definition of a spouse, same sex couples will have to resort to additional layers of tax planning and documentation to minimize the tax incidences that us heterosexuals take for granted. Shared housing, financial support, inter-se transfers, or separation settlements, must all be carefully engineered, contractually formalised, and contemporaneously evidenced when undertaken by same-sex partners. What operates as an administrative presumption for some becomes a highly rebuttable assertion requiring proof for others. The result is not just possibly higher tax incidence, but higher compliance cost, interpretive risk, and litigation exposure. Same-sex couples must actively defend transactions that the tax law otherwise treats as ordinary incidents of family life, structuring their affairs to fit within provisions designed for dealings between otherwise unrelated persons. Until the statute evolves to reflect economic reality rather than marital form, tax effectiveness can come in only through effort, foresight, and professional intervention that most taxpayers never need to contemplate.
Legally Invisible: How Indian Tax Law Fails Same-Sex Couples
A structured walkthrough of the tax gaps, transactional exposures, and compliance costs that arise from the absence of a statutory spousal definition for same-sex partners under the Income Tax Act, 1961.