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Taxation of Trusts
A "trust" is an obligation annexed to the ownership of property and arising out of a confidence reposed in and
accepted by the owner, or declare and accepted by him, for the benefit of another, or of another and the owner.
Author of trust : the person who reposes or declares the confidence is called
"author of the trust". Trustee : The person who accepts the confidence is called the "trustee". Beneficiaries : The person for whose benefits the confidence is accepted is
called the "beneficiary". Trust property : The subject matter of the trust is called the "trust
property" or "trust money". Instrument of trust : The instrument, if any, by which the trust is declared
is called the "instrument of trust".
Public or Private Trusts
Public trust are generally formed for charitable or religious purposes, and are not intended to do commercial
activities. A public charitable trust is one, which benefits the public at large, or some considerable portion
of it. While, the income from private trusts is available to specified beneficiaries and not to the public at
large.
A charitable trust is defined to include relief of the poor, education, medical relief, and the advancement of
any other object of general public utility. Promotion of sports and games is considered to be a charitable
purpose.
The public or private trust, differ in the process of their creation. In creating a charitable or religious
trust, a formal deed or any other writing is not necessary, even if it involves immovable property. It may be
created by use of words, but what is necessary is that there should be divestment of property on the part of
the author or the settlor of the trust and should vest in the trustee, a third person.
Private trusts are created and governed by the provisions of the Indian Trusts Act, 1882 , whereas charitable
trusts are beyond this Act. The Act applies to whole of India except when specifically amended by any State
Government.
Trusts, whether public or private are subjected to taxation under the Income Tax Act,1961. It is the umbrella
Act for all the matters relating to income tax and empowers the Central Board of Direct Taxes (CBDT) to
formulate rules (The Income Tax Rules,1962) for implementing the provisions of the Act. The CBDT is a part of
Department of Revenue in the Ministry of Finance. It has been charged with all the matters relating to various
direct taxes in India and is responsible for administration of direct tax laws through the Income Tax Department.
The Income Tax Act is subjected to annual amendments by the Finance Act, which mentions the 'rates' of income
tax and other taxes for the corresponding year.
Taxation of Public Trusts
To find out the taxable income of a charitable or religious trust :
Compute the income of a trust. Here, "income" includes voluntary contributions
received by a trust/institution created wholly or partially for charitable or religious purposes. The
income of a trust/institution is required to be computed as per the provisions of the Income Tax Act. Find out the part of income exempt under section 11 or section 12 of the Act.
Trusts/Institutions are required to register themselves under Section 12AA in order to avail the exemptions.
This can be done by writing an application in Form 10A within a year from the date of setting of
trust/institution. Broadly, the scheme of the provisions regarding the exemptions may be summarized as
follows :
The creation of trust must be wholly for charitable purposes and the
objectives of the trust should be for charitable purposes, as defined under the Act. The trust should not be created for the benefit of any particular religious
community or caste. The trust should not be created for carrying on business for profit. The properties settle upon the trust must be held in trust. It would not
suffice if only the income is held in trust. The trust deed must contain a provision that the income of the trust or the
property held in trust would be utilized, for charitable purposes in India. It should be ensured that income or property of the trust does not ensure
for the benefit of the settlor/ author of the trust or his relatives.
Charitable or religious trusts, which may otherwise be eligible for tax exemption, are liable to forfeit
this exemption under Section 13 of the Act. It is applicable in the following circumstances :
Where the trust is created after March 31, 1962, any part of the income of the trust
ensures, under the terms of the trust deed, directly or indirectly, for the benefit of specified categories
of persons such as, the author of the trust, trustee or manager of the trust, substantial contributor to
the trust and any relative of such author, trustee, etc. Any part of the income or any property of the trust is used or applied during the
relevant year, directly or indirectly, for the benefit of specified categories of persons. The trust funds(with certain exceptions) are invested in contravention of the
investment pattern of such funds.
Where a charitable or religious trust forfeits tax exemption in the circumstances mentioned at (a) to (c) above,
the trust shall be charged to tax at the maximum marginal rate. A trust will attract the maximum marginal rate
of tax only on that part of income which has forfeited exemption under the above circumstances and not on the
entire income of the trust.
Besides there are other provisions of the Act, which are relevant to the taxability of the income of
charitable or religious trusts. These provisions are summarized as follows :
Filing of return of income [Under section 139(4A)] by trustees of charitable or
religious trusts if the total income of trust exceeds the minimum amount which is chargeable to income-tax
without giving effect to provisions of Section 11 and 12. Also, trusts/institutions whose income is
exempted under Section 11 and Section 12 are also required to file a return as assessee's claim for
exemption would be decided by the Income Tax Department only after it has received the relevant material
from the assessee.
The return of income has to be filed along with the audit report submitted by chartered accountants in Form
10B after auditing accounts of various trusts/institutions. Liability of trustees as 'representative assessees' [Under section 161] wherein they
are liable to tax in their representative capacity in respect of income of trust. Under section 80G, deduction (special exemptions) in respect of donations to certain
funds, charitable institutions, etc is granted. In order to be eligible under this section, the charitable
trusts/institutions need to obtain a valid certificate by making an application to them in Form 10G. The
form should be accompanied by following documents :
Copy of registration granted under Section 12A Notes on activities of institutions/fund/trusts since the time of its
inception or during last three years,whichever is less and Copies of accounts of trust/institution since the time of its inception or
during last three years,whichever is less.
Wealth tax is also not charged on properties held under trust, or other legal
obligation, for public purposes of a religious or charitable nature under Section 5(i) of Wealth Tax Act.
In certain cases, however, Section 21A of the Wealth Tax Act lays down that wealth of trust is chargeable
to tax as if the property is held by an individual who is a citizen of india and resident in India for the
purpose of Act. Donors are given relief from income tax in respect of donations made to institutions
established in India for charitable purpose. There are specific provisions relating to public charitable/religious trusts under
section 10 of the act. The incomes of these trusts do not form part of total income or the income of such
trusts are exempt from income tax. The trustees of a charitable or religious trust are required to make an application
to the prescribed authority for allotment of a Permanent Account Number (PAN) under the provisions of Section
139A of the Income Tax Act.
In certain cases, income of a charitable/religious trust, which is not subject to exemption under section 11 or
section 12, may be chargeable to tax as if it is the income of an association of persons(AOP) :
Income from property held under trust wholly for charitable or religious purposes Voluntary contributions without any direction that they shall form part of corpus of
trust or Income of trust or institution being profits and gains of business which is
incidental to the attainment of the objectives of trust and separate books of account are maintained.
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Taxation of Private Trusts
When the shares of the individual beneficiaries are determinate :
The shares falling to each of the beneficiaries are liable to be assessed, either in
the hands of the trustee(s) as a representative assessee or directly in the hands of the beneficiary
entitled to the income. Such assessment is made at the rate applicable to the total income of each
beneficiary. Where the income of the trust consists of or includes profits and gains of business,
income tax shall be charged in the hands of trustee(s) on the whole of the income at the maximum marginal
rate. This provision is not applicable, in the case of a trust which has been declared by any person
exclusively for the benefit of any relative dependent on him and also such trust is the only trust so
declared by him.
When the individual shares of the beneficiaries are indeterminate or unknown [under section 164] :
Trustee(s) is liable to tax as a representative assesses. Where the income consists of, or includes, profits and gains of business, the entire
income of the trust is charged at the maximum marginal rate of tax, except in cases of the a trust which has
been declared by any person exclusively for the benefit of any relative dependent on him and also such trust
is the only trust so declared by him. Where the income does not consist or include profits and gains of business, income
is chargeable at the maximum marginal tax rate.
However, the maximum marginal rate of tax is not applicable in the following cases, and the income will be
chargeable to tax as if it were income of an association of persons(AOP) :
Where none of the beneficiaries has any other income chargeable to tax under the
Income Tax Act and none of the beneficiaries is a beneficiary under any other trust or Where the relevant income or part of 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 is a non-testamentary trust created before March 1, 1970 for the
exclusive benefit of relatives of the settlor mainly dependent on him for their supporter maintenance or,
where settlor is a Hindu undivided family, for the exclusive benefit of its members so dependent upon it
or Where the trust is created on behalf of a provident fund, superannuation fund,
gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or
profession exclusively for the benefit of persons employed in such business or profession.
In cases of (a), (b) and (c) supra, the relevant income is taxable in the hands of trustees as if it were the
total income of an association of persons, while income falling under (d) supra is exempt from tax.
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