Taxation of Private Trust & Tax Planning

Article Index:

1. Types of private trusts for the purpose of return filing.

2. Type of return for private trusts for e-filing

3. Tax rate applicable for trusts mentioned above.

4. Is PAN mandatory for private trusts? How to obtain PAN for private trust?

5. How to calculate tax in the case of private specific trusts and whether
more than 1 return has to be filed, in the case of multiple beneficiaries, by
the trustee(s)?

6. How to compute tax in case of private discretionary trust?

7. Whether a private trust can accept gifts from related and unrelated
persons and whether trust property is taxable in the hands trustee as gift
when the same is transferred to the trust?

8. Tax status-when a trust is revocable, irrevocable and revoked?

9. Whether a settlor can transfer trust income, without transferring the trust
property?

10. Tax treatment in the hands of settlor-when property is transferred by

him to the trust?

11. Is private trust a real tax planning tool? Important

12. Whether private trust can claim deductions u/c VIA?

13. Trust related exam based question released by FPSB India.

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 1. Types of private trusts for the purpose of return filing.

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Notes:
Point 1: in the following case rates applicable to Individuals will be charged:

If the trust has been declared by way of a will from which business income is
derived; and
It is exclusively declared for the benefit of any relative dependent on the
settlor for support and maintenance; and
The trust is the only trust so declared by the settlor.

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Point 2: in the following cases rates applicable to Individuals will be charged:
1. Where none of the beneficiaries

Has taxable income exceeding 250000 for AY 17-18

Is a beneficiary under any other private trust; or

2. Where the relevant 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

3. Where the trust yielding the relevant income or part thereof 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 dependant relatives of the settlor, or where
the settlor is HUF, exclusively for the benefit of the dependant members.

4. 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
bona fide by a person carrying on a business or professional exclusively for the
benefits of his employees.

Tax treatment of settlor / grantor

If the trust effectively alienates income from the settlor/grantor, income tax
liability thereon shall stand transferred to the trustee(s).
However, the settlor/grantor continues to be liable to income tax on income
from the settled property to the extent that it is for the immediate or
deferred benefit of a spouse or minor child.
Stamp duty is payable on the transfer of immovable property.

4. Is PAN mandatory for private trusts? How to obtain PAN for private
trust.
Yes, the private trust needs to apply for PAN in order to file the ITR. The PAN
application can be made to a specified authority along with the following
documents;
1. Address proof
2. Bank a/c of the private trust.
3. Trust deed

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

1. The tax in the case of private specific trusts is to be calculated in the same way
as calculated for individuals slab rate starting from Rs. 2,50,000 (in our opinion the
slab should depend upon the beneficiaries status-if the trust has solo
beneficiary)after allowing all deductions and set-off of losses.

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2. If there is more than one beneficiary, then the slab should start from
Rs.2,50,000.

3. However, where the trust has business income, the rate applicable wills
30%+3%, however, if the following three 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
derived; and
It is exclusively declared for the benefit of any relative dependent on the
settlor for support and maintenance; and
The trust is the only trust so declared by the settlor.

4. In case of more than one beneficiary, only one return will be filed by the
trustee(s) in the representative capacity.

Note: Question taken from FPSB India Sample paper.

6. How to calculate tax in the case of private discretionary trusts?

a. If income does not includes Profit & Gain From Business & profession
(PGBP) income-
i. General rate-30%+3% (EC)

ii. . Slab rate if the following conditions are satisfied:

Where none of the beneficiaries

- Has taxable income exceeding 250000 for AY 2017-18
- Is a beneficiary under any other private trust; or

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 Where the relevant 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 relevant income or part thereof 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
settlor, or where the settlor is HUF, exclusively for the benefit 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 bona fide by a person carrying on a business or
professional exclusively for the benefits of his employees.

b. If income includes PGBP income-

i. General rate-30%+3%
ii. Slab rate if the following conditions are satisfied:

If the trust has been declared by way of a will from which business income is
derived; and
It is exclusively declared for the benefit of any relative dependent on the
settlor for support and maintenance; and
The trust is the only trust so declared by the settlor.

iii. In case of more than one beneficiary, only one return will be filed by the trustee
in the representative capacity.

7. Whether a private trust can accept gifts for related and unrelated
persons and whether trust property is taxable in the hands trustee as gift
when the same is transferred to the trust?
Generally speaking a trust is created by a person the watch interests of his
“relatives “, hence in majority of cases the tax shall not be chargeable in case
property gifted/transferred, whether movable or immovable, as per section
56(2)(vi) and 56(2) (vii) in the hands of the transferee.

56 (2) [(vi) where any sum of money, the aggregate value of which exceeds fifty
thousand rupees, is received without consideration, by an individual or a Hindu
undivided family, in any previous year from any person or persons on or after the
1st day of April, 2006 [but before the 1st day of October, 2009], the whole of the
aggregate value of such sum:

Provided that this clause shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or

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(e) from any local authority as defined in the Explanation to clause (20) of section
10; or
(f) from any fund or foundation or university or other educational institution or
hospital or other medical institution or any trust or institution referred to in clause
(23C) of section 10; or
(g) from any trust or institution registered under section 12AA.

Explanation.—For the purposes of this clause, “relative” means—

(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of the person referred to in clauses (ii) to (vi);]
[(vii) where an individual or a Hindu undivided family receives, in any previous
year, from any person or persons on or after the 1st day of October, 2009,—

(a) any sum of money, without consideration, the aggregate value of which exceeds
fifty thousand rupees, the whole of the aggregate value of such sum;

[(b) any immovable property, without consideration, the stamp duty value of which
exceeds fifty thousand rupees, the stamp duty value of such property;]

(c) any property, other than immovable property,—

(i) without consideration, the aggregate fair market value of which exceeds fifty
thousand rupees, the whole of the aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate fair market value of the
property by an amount exceeding fifty thousand rupees, the aggregate fair market
value of such property as exceeds such consideration :

Provided that where the stamp duty value of immovable property as referred to in
sub-clause (b) is disputed by the assessee on grounds mentioned in sub-section (2)
of section 50C, the Assessing Officer may refer the valuation of such property to a
Valuation Officer, and the provisions of section 50C and sub-section (15) of section
155 shall, as far as may be, apply in relation to the stamp duty value of such
property for the purpose of sub-clause (b) as they apply for valuation of capital
asset under those sections :

Provided further that this clause shall not apply to any sum of money or any
property received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer or donor, as the case may be; or

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(e) from any local authority as defined in the Explanation to clause (20) of section
10; or
(f) from any fund or foundation or university or other educational institution or
hospital or other medical institution or any trust or institution referred to in clause
(23C) of section 10; or
(g) from any trust or institution registered under section 12AA.

Explanation.—For the purposes of this clause,—

(a) “assessable” shall have the meaning assigned to it in the Explanation 2 to sub-
section (2) of section 50C;
(b) “fair market value” of a property, other than an immovable property, means the
value determined in accordance with the method as may be prescribed;
(c) “jewellery” shall have the meaning assigned to it in the Explanation to sub-
clause (ii) of clause (14) of section 2;

(d) “property” [means the following capital asset of the assessee, namely:—]
(i) immovable property being land or building or both;
(ii) shares and securities;
(iii) jewellery;
(iv) archaeological collections;
(v) drawings;
(vi) paintings;
(vii) sculptures; [***]
(viii) any work of art; 1[or]
[(ix) bullion;]

[(e) "relative" means,—

(i) in case of an individual—
(A) spouse of the individual;
(B) brother or sister of the individual;
(C) brother or sister of the spouse of the individual;
(D) brother or sister of either of the parents of the individual;
(E) any lineal ascendant or descendant of the individual;
(F) any lineal ascendant or descendant of the spouse of the individual;
(G) spouse of the person referred to in items (B) to (F); and
(ii) in case of a Hindu undivided family, any member thereof;]
(f) “stamp duty value” means the value adopted or assessed or assessable by any
authority of the Central Government or a State Government for the purpose of
payment of stamp duty in respect of an immovable property;]

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8. Tax status-when a trust is revocable, irrevocable and revoked.
Sl. No. Particulars Consequences
1 Where the trust is revocable from the The income from trust income will be
beginning. taxable in the hands of the settlor from
inception section 61

2. When the trust is irrevocable for a During the period the trust was not
specified period under section 62 revocable, the trustee shall be liable to
pay tax in representative capacity.

3. When the trust, which was irrevocable The property will get back to the settlor
gets revoked due to death of the or any other person specified in the trust
beneficiary(ies) deed or the legal inheritor of the property
and he shall be liable to pay tax on the
income from such property from the date
of transfer.

Section 61- REVOCABLE TRANSFER OF ASSETS.

All income arising to any person by virtue of a revocable transfer of assets shall be
chargeable to income-tax as the income of the transferor and shall be included in
his total income.

Section 62- TRANSFER IRREVOCABLE FOR A SPECIFIED PERIOD.

(1) The provisions of section 61 shall not apply to any income arising to any person
by virtue of a transfer -
(i) By way of trust which is not revocable during the lifetime of the beneficiary,
and, in the case of any other transfer, which is not revocable during the life time of
the transferee; or

(ii) Made before the day of April, 1961, which is not revocable for a period
exceeding six years : Provided that the transferor derives no direct or indirect
benefit from such income in either case.
(2) Notwithstanding anything contained in sub-section (1), all income arising to any
person by virtue of any such transfer shall be chargeable to income-tax as the
income of the transferor as and when the power to revoke the transfer arises, and
shall then be included in his total income.

Section 63- “TRANSFER” AND “REVOCABLE TRANSFER” DEFINED.

For the purposes of sections 60, 61 and 62 and of this section, -
(a) A transfer shall be deemed to be revocable if –

(i) It contains any provision for the re-transfer directly or indirectly of the whole
or any part of the income or assets to the transferor, or

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(ii) It, in any way, gives the transferor a right to re-assume power directly or
indirectly over the whole or any part of the income or assets;

(b) “Transfer” includes any settlement, trust, covenant, agreement or arrangement

9. Whether a settlor can transfer trust income, without transferring the

trust property.
TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SEC. 60)
Section 60 is applicable if the following conditions are satisfied:
1. The taxpayer owns an asset
2. The ownership of asset is not transferred by him.
3. The income from the asset is transferred to any person under a settlement or
agreement.
If the above conditions are satisfied, the income from the asset would be taxable in
the hands of the transferor i.e. the settlor.

10. Tax treatment in the hands of settlor-when property is transferred by

him to the trust? Transfer of capital assets – section 47(iii) of the Income Tax Act,
1961 any transfer of a capital asset under a gift or will or an irrevocable trust
is not regarded as transfer and hence not subjected to capital gain tax. If a
person settles any property under an irrevocable trust, then he is not required to
pay any capital gain tax on such transfer.

11. Is private trust a real tax planning tool?

In most of the cases people are confronted with the issue as to whether private
trust is at all a tax saving tool in the hands of the tax payer (consider the time,
money and energy spent on creating the private trust).

Is it at all worth creating a private trust?

In our opinion, the biggest misconception in the minds of people is that by creating
multiple private trusts for a single beneficiary, the tax can be saved by each trust
by claiming tax as per the tax slab.

Consider the following example:

Mr. X has 4 properties and he has one son “Y” of 20 years of age. He wants to
create private trust for his son. He creates 4 private trusts in order to claim basic
exemption

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 Total income from all the properties: Rs. 6,60,000.00 Actual tax +EC
for AY 17-18 (for someone below the age of 60 years) 58710

Now, Mr. X believes that by creating for 4 trusts he can save Rs.
58710 tax.

However, it may be clearly mentioned here the A.O. has the option to
make the assessment directly on the beneficiaries as per section 166.

In our opinion, a private is only a protection tool as against the tax

planning tool. It can be used to protect the interests of the
beneficiaries, but the beneficiaries have to pay the legitimate tax,
which is otherwise payable by them in case they were not shielded
by the private trust.

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12. Whether private trust can claim deductions u/c VIA? Yes, a private
trust which invests/incurs expenditure on behalf of the beneficiary is eligible to
claim deduction u/c VIA and further is also eligible for set-off and carry-forward of
losses.

13. More FAQs

1. Whether a settlor can have more than one private trust?

Yes, a settlor can have more than 1 private trust. This depends on his tax planning.

2. How immovable property is to be transferred to the private trust?

The property is transferred by a duly registered transfer deed/trust deed. The
stamp duty is applicable. Please contact your local civil lawyer to know more on
this.

3. Whether registration is necessary even if the settlor owns the property?

Yes, but only in the case of property being immovable property.

4. Whether immovable property is to be transferred in the name of only

one trustee (where more than one trustee is present in one trust)?
The trust is a juridical artificial person and the trust property will be transferred to
the trust and the property will be managed by the trustee. The name of the trustee
(s) will appear on the deed of transfer in representative capacity.

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