Taxation Of Private Trust

Income tax return filing under Indian income tax has undergone much change after the introduction of e-filing. The main problem of most of the assessees, being a private trust, is the manner of filing their tax return, the type of form to be used and if to e-file or not. The article studies calculating tax related to determinate and indeterminate beneficiaries of a private trust and calculating tax in a private specific trust and private deterministic trust.

How to calculate tax when the shares of the individual beneficiaries in a private trust are determinate?

The shares liable to each of the beneficiaries are to be assessed, either in the hands of the trustee as a representative assessee or directly in the hands of the beneficiary who is entitled to the income. Such an assessment is made at the rate that is applicable to the total income of each beneficiary. Where the income of the trust comprises of or is inclusive of profits and gains of business, income tax shall be charged in the hands of trustee(s) on the entire income at the maximum marginal rate. This provision is therefore not suitable, in the case of a trust which has been declared by any person completely for the benefit of any relative dependent on him and too such trust is the only trust that is so declared by him.

How to calculate tax when the individual shares of the beneficiaries are indeterminate or unknown, under the terms of section 164?

Trustee(s) is liable to tax as a representative assesses. Where the income comprises of, or includes, profits and gains of business, the complete income of the trust is charged at the maximum marginal rate of tax, except in events of the a trust which has been declared by any person solely for the advantage of any relative dependent on him and also such trust is the only trust so as declared by him. Where the income does not comprise or include profits and gains of business, income is charged at the maximum marginal tax rate.

How to calculate tax in the case of private specific trusts?

The tax in the event of private specific trusts is to be calculated in the similar manner as calculated for individuals slab rate starting from Rs. 1, 80,000 after allowing all deductions and set-off of losses. If there is more than one beneficiary, then the slab should start from Rs.1 80,000. However, where the trust has business income, the rates applicable will be 30%+3%, however, if the following 3 conditions are met cumulatively, the tax rate will be slab rate.

If the trust has been declared by way of a will from which business income is obtained.
It is exclusively declared for the benefit of any relative dependent on the settler for the reason of support and maintenance.
The trust is the only trust therefore declared by the settler.

In the event of more than one beneficiary, no more than one return will be filed by the trustee(s) in the representative capacity.

How to compute tax in the case of private discretionary trusts?

If income does not includes Profit & Gain From Business & profession (PGBP) income:

General rate of 30%+3% (EC) Slab rate if the following conditions are satisfied:

Where none of the beneficiaries:
- Has taxable income exceeding Rs. 180000 or Rs. 190000 or Rs. 250000
- Is a beneficiary under any other private trust; or

Where the pertinent income or part of the relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; or
Where the trust yielding the pertinent income or related part was created by a non-testamentary instrument before 1-3-1970 and the A.O. is satisfied that it was created bona fide for the benefit of the dependent relatives of the settler, or where the settler is HUF, exclusively for the advantage of the dependent members.
Where the relevant income is receivable by the trustees on behalf of a provident fund/ superannuation fund/ gratuity fund or pension fund or any other fund created genuinely by a person carrying on a business or professional completely for the benefits of his employees.

If income includes PGBP income:

General rate-30%+3% Slab rate if the subsequent conditions are satisfied:

If the trust has been declared by way of a will from which business income is obtained; and
It is exclusively declared for the benefit of any relative dependent on the settler for support and maintenance; and
The trust is the only trust so declared by the settler.
In the event of more than one beneficiary then only one return will be filed by the trustee in representative capacity.

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Frequently Asked Questions

Common questions about Taxation of Private Trusts Under Indian Income Tax Regulations.

For a private trust with determinate beneficiary shares, the shares liable to each beneficiary are assessed either in the hands of the trustee as a representative assessee or directly in the hands of the beneficiary entitled to the income. The tax rate applicable is the same as the total income of each beneficiary.

When the individual shares of the beneficiaries are indeterminate or unknown, the trustee(s) is liable to pay tax as a representative assessee. If the income includes profits and gains from business, the entire income is charged at the maximum marginal tax rate, except in specific cases where the trust is solely for the benefit of a relative dependent on the settlor.

Tax for a private specific trust is calculated similarly to individuals, using the slab rate starting from Rs. 1,80,000 after allowing deductions and set-off of losses. If there are multiple beneficiaries, the slab starts from Rs. 1,80,000. However, if the trust has business income, a flat rate of 30% + 3% may apply unless certain conditions are met.

A private specific trust with business income can be taxed at the slab rate if the following three conditions are met cumulatively: (1) the trust is declared by a will from which business income is obtained, (2) it is exclusively for the benefit of a relative dependent on the settlor for support and maintenance, and (3) it is the only trust declared by the settlor.

For a private discretionary trust without business income, the general tax rate is 30% + 3% (EC). However, the slab rate may apply if none of the beneficiaries has taxable income exceeding the specified limit, is not a beneficiary under any other private trust, or if the trust meets certain conditions related to its creation and purpose.

For a private discretionary trust with business income, the general tax rate is 30% + 3%. The slab rate may apply if the trust is declared by a will from which business income is obtained, is exclusively for the benefit of a relative dependent on the settlor for support and maintenance, and is the only trust declared by the settlor.

Yes, in the case of a private trust with multiple beneficiaries, only one return will be filed by the trustee(s) in a representative capacity, regardless of whether it is a specific or discretionary trust.

Yes, there is a difference in tax calculation for testamentary (created by a will) and non-testamentary (created by an instrument) trusts. Testamentary trusts may be eligible for the slab rate if they meet certain conditions, while non-testamentary trusts created before 1-3-1970 for the benefit of dependent relatives may also qualify for the slab rate if certain conditions are met.

Yes, if the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund, or any other fund created genuinely by a person carrying on a business or profession solely for the benefit of their employees, the slab rate may apply.

Yes, the tax calculation for private trusts and public trusts is different. The article focuses specifically on the tax calculation for different types of private trusts, while public trusts may have different tax implications and regulations.