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.
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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-
| Case | Section | Rate of tax | Exceptions |
|---|---|---|---|
| A.Non-testamentary or oral trust | |||
| A.1 Non-testamentary or oral trust | 164A | MMR | Note 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) | MMR | Note 2 |
| B.3 Discretionary trust | 164(1) | MMR | Note 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
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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-
| Case | Section | Rate of tax | Exceptions |
|---|---|---|---|
| A. Income wholly for charitable or religious purposes | |||
| A.1 Section 13(1) (c or d) not applicable | 164(2) | Rate applicable to AOP i.e.slab rate benefit available | Note 5 |
| A.2 Section 13(1) (c or d)applicable | Proviso 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 proviso | MMR | Note 6 |
| B.1.2 Discretionary (having profit & gain from business) | 164(3) & second proviso | MMR | Note 7 |
| B.2 Section 13(1) (c or d) not applicable | |||
| B.2.1 | 164(3) & third proviso | MMR | None |
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.
