Trusts are created for social, charitable and religious purposes in India. However, they are not limited to those purposes. Apart from the trusts that can accept donations from the public at large and created for welfare activities, people can create private trusts as well. However, the tax implications for private trusts differ from that of normal trusts. Let’s understand everything you should know about the taxation of private trusts in India.
A private trust is an investment vehicle through which property can be transferred from one person to another or a group of people for their benefit. These trusts are created for the benefit of specific people i.e., ascertainable individuals. That is to say, these individuals are either already ascertained or will be ascertained within a definite period of time.
Private trusts are also popularly called as family trusts as distribution of wealth among the family members have remained one of the most popular reasons to form a private trust. A family trust is set up to benefit the members of the family. The idea behind this is that the settlor of the trust progressively transfers all the assets to the trust. Eventually, the settlor owns no assets himself but through the trust, the beneficiary gets the benefit of the assets transferred to the trust. Following are some of the peculiar characteristics of private trusts:
For the purpose of taxation of private trusts, they are divided into the following categories:
Here’s how the taxation of private trusts works:
In this case, the transfer should be considered as revocable if it contains any provision for the retransfer of the whole or any part of the assets or income to the transferor directly or indirectly or if it gives the transferor the right to reassume power directly or indirectly over whole or any part of the assets or income. In this case, the trust will be disregarded and the income will be taxed in the hands of the settlor.
In this case, the beneficiaries are identifiable and their shares are determined. Therefore, the trustee is assessed as the representative assessee. The tax shall be levied and recovered from him in the same manner and to the same extent as it would be levied and recovered from a person represented by him. Alternatively, the assessment can be done in the hands of the beneficiaries as well.
The trustee would be assessed and he would hold the same status as the beneficiary of the trust whose interest is sought to be taxed. Therefore, the status of the trustee will depend upon the status of the beneficiary to the extent of their shares.
The trustee shall be eligible to claim all the deductions, benefits and allowances that can be claimed by an individual assessee. The tax rate should be the same as applicable to the beneficiaries in case of income other than business income. In the case of business income, the Maximum Marginal Rate (MMR) should be applicable. However, when the trust is declared by a will exclusively for the benefit of any relative dependent for support and maintenance and the concerned trust is the only trust declared by him, then the tax rate for family trust shall be the one applicable to AOP.
Irrevocable discretionary trust should have the same status as an individual. The trustees assessed in a representative capacity shall be eligible to claim all the deductions, benefits and allowances that can be obtained by the individual beneficiary. The tax rate for irrevocable discretionary trust should be MMR except where the trust is declared exclusively for the benefit of any relative dependent upon him for maintenance and support and the concerned trust is the only trust declared by him. In such a case, the tax rate applicable to AOP shall be applicable to the private trust as well.
Following are the complete details relating to the taxation of family trusts in India. For more information, feel free to contact the ASC Group.
Also, Check "Taxation of Business Trust"
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