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Trusts Act 1882 Types & Taxation Policies Under Income Tax

Income Tax Trust Act Type and Taxation

In simple words, a trust is an organization to which the owner donates his property for the benefit of others from that particular property. Whereas, Trust, as defined by the authority, is a commitment affixed to the ownership of property, and arising out of confidence rested in and accepted by the owner, or declared and accepted by him, for the benefit of another.

The process revolves around three parties settler (on whom there lies confidence), trustee (who is responsible for extending the property for the profit of beneficiaries) and beneficiaries (for whose benefit property ownership is extended). When it comes to taxation of the trust the major role is of the beneficiaries as their social and financial status is the main determinant.

Types of Trusts Act 1882

Discretionary & Non-discretionary Trust – Discretionary trusts are those in which the trustee has the power to decide on the distribution of the income and the aggregate of the beneficiaries whereas in the non-discretionary trust, the power is in the hands of the settler to designate the entitlement.

Testamentary & Non-testamentary Trust – Testamentary trust is formed based on a written obligation and non-testamentary trust is created without a written deed.

Public or Private or Public Cum Private Trust – If beneficiaries are large public groups or if the trust is a religious trust, then they are categorized as public trusts. In cases where beneficiaries are individuals or families, those organizations are private trusts and both the two in one organization are public cum private trusts.

To be noted: Public Trusts are not included in the Indian Trust Act 1882 and apply to private trusts.

Read Also: How New Income Tax Rules Will Affect the TDS You Pay on Services

Provisions Mentioned for Trusts under the Income Tax Act

General provisions:

Trusts Act is not covered under the definition of person u/s 2(31) however reference to trust can be found u/s 2(15), 10(23C), 11, 12A, 12AA, 13, 115BBC, 115TD to 115TF, 160, 161, 164 & 164A, primarily because trust is not a legal entity and tax law wish to use the concept of representative assessee to tax the trust.

As per the provisions under Chapter 15 of the Income Tax Act, the trustee is the chief assessee on behalf of the beneficiaries and the amount of tax payable to the government depends upon the social status of the beneficiaries.

Some exceptions where the income tax of the trust act is taxable under the law:

  • A genuine trust needs to be formed and the property needs to be duly transferred to the trust, in case of any cancellation in the trust deed then sections 60 to 63 apply which needs to be handled by either the settler or author of the respective trust.
  • As mentioned in chapter 11 of sections 60 to 63 if transfer of income without transfer of property to the trust or revocable transfer, in such cases income is taxable under the law.
  • As per the provisions in section 166, the Assessing Officer has the choice to assess either the representative assessee or the person whom he represents. Once the decision is made it cannot be altered even by the assessing officer.

Tax Rates Applicable on Public or Private Trusts Act

Private Trusts Act-

CaseSectionRate of taxExceptions
A.Non-testamentary or oral trust
A.1 Non-testamentary or oral trust164AMMRNote 1
B.Testamentary or written trust
B.1 Non-discretionary (not having profit & gain from business)161(1)Rate applicable to the total income of each beneficiary
B.2 Non-discretionary (having profit & gain from business) 161(1A)MMRNote 2
B.3 Discretionary trust164(1)MMRNote 3 & 4

Note-1: Within 3 months from the date of declaration of the trust, the statement needs to be duly signed by the trustee(s) mentioning the purpose(s) of the trust having details of trustee(s), beneficiary(ies) and trust assets and should be submitted to the AO, after the process, the trust is treated as written trust.

Note 2: A particular trust is the one created under ‘will’ for supporting and upkeeping dependent relatives.

Note-3: The percentage of beneficiaries is not definite in the case of discretionary not having profit & gain from business exceptions are:

  • a. None of the beneficiaries are beneficiaries under any other trust or have income from any other source more than a threshold limit or otherwise is chargeable at a rate more than MMR.
  • b. Where a particular trust is the one created under ‘will’ for support and maintenance of dependent relatives

Similar: A Brief Study of Newly Added TDS Section 194M

Note-4: The percentage of beneficiaries is not definite i.e. discretionary having profit & gain from business exceptions is:

  • Where a particular trust is the one created under ‘will’ for the support and maintenance of dependent relatives
  • In the case of B.2 and B.3 (in the table), the applicable exception rate will be of AOP i.e. with slab rate benefit instead of MMR

Public Trusts Act-

CaseSectionRate of taxExceptions
A. Income wholly for charitable or religious purposes
A.1 Section 13(1) (c or d) not applicable164(2)Rate applicable to AOP i.e.slab rate benefit availableNote 5
A.2 Section 13(1) (c or d)applicableProviso to 164(2)MMR
B. Income in part only for charitable or religious purposes
B.1 Section 13(1) (c or d) not applicable
B.1.1 Discretionary (not having profit & gain from business)164(3) & first provisoMMRNote 6
B.1.2 Discretionary (having profit & gain from business)164(3) & second provisoMMRNote 7
B.2 Section 13(1) (c or d) not applicable
B.2.1164(3) & third provisoMMRNone

Note-5: Under section 13(1) (c or d), the trust’s income is directly or indirectly applied for the benefit of any person referred u/s 11(3) or funds of the trust are used in violation of section 11(5).

Note-6: The percentage of beneficiaries is not definite i.e. discretionary not having profit & gain from business exceptions is:

  • None of the beneficiaries are beneficiaries under any other trust or have income from any other source more than a threshold limit or otherwise is chargeable at a rate more than MMR.
  • Where a particular trust is the one created under ‘will’ for the support and maintenance of dependent relatives.

Note-7: Where a particular trust is the one created under ‘will’ for support and maintenance of dependent relatives.

Disclaimer:- "All the information given is from credible and authentic resources and has been published after moderation. Any change in detail or information other than fact must be considered a human error. The blog we write is to provide updated information. You can raise any query on matters related to blog content. Also, note that we don’t provide any type of consultancy so we are sorry for being unable to reply to consultancy queries. Also, we do mention that our replies are solely on a practical basis and we advise you to cross verify with professional authorities for a fact check."

Published by Atul Mittal
Atul is a professional content writer with specialisation in business and marketing content. I have been writing tax articles and news for about two years now and have good experience in GST and income tax domains. View more posts
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  1. In a private family trust who owns the Trust property? Does the settler own the property? If so, can it be claimed by a creditor of the settler to recover his dues?

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