Taxation on Trusts

Taxation on public trusts

Charitable and religious trusts, which are otherwise eligible for tax exemption, will be liable to forfeit this exemption under Section 13 of the Act. This is applicable in following circumstances:

• When the trust is created after March 31, 1962, then any part of income of the trust ensures, directly or indirectly, for the benefit of specific categories of persons like, the author of the trust, trustee or the manager of the trust, substantial contributor to the trust and also any relative of such author, trustee, etc.
• Any part of the income/property of the trust is used during the relevant year, directly or indirectly, for the benefit of given categories of persons.
• If the trust funds are invested in contravention of investment pattern of such funds.

There exist other provisions of the Act, which are relevant to taxability of income of charitable & religious trusts. These provisions are as follows:

• Filing of return of the income [U/s 139(4A)] by trustees of a charitable or religious trusts if total income of the trust exceeds the minimum amount that is chargeable to income-tax without giving an effect to provisions of Section 11 and 12.
• Liability of the trustees as 'representative assessees' [U/s 161] wherein they are liable to tax for their representative capacity in respect of the income of trust.
• U/s 80(G), deductions (or special exemptions) in respect of donations to certain funds, or charitable institutions, etc is granted. For being eligible under this section, the charitable trusts or institutions require to obtain a valid certificate by given an application to them in Form 10G

Taxation on private trusts

When shares of individual beneficiaries are determinate:

• The shares of all beneficiaries are liable to be assessed, either by the trustee(s) as a representative assessee or sometimes directly in the hands of the beneficiary entitled to income. The assessment is made at the rate that is applicable to total income of each beneficiary.
• If the income of the trust consists of profits and gains of business, income tax is charged in the hands of trustee(s) on the whole of the income & at maximum marginal rate. This provision is not applicable, incase of a trust which has been declared by anyone exclusively for the benefit of a relative dependent on him and if this trust is the only trust so declared by him.

When individual shares of beneficiaries are indeterminate [U/s164]:

• As a representative assesses, the Trustee(s) is liable to tax.
• If the income consists of profits and gains of business, then the entire income of the trust is charged at maximum marginal rate of tax, except in cases of the a trust that has been declared by a person exclusively for the benefit of a relative dependent on him and if this trust is the only trust so declared by him.
• When the income does not consist profits and gains of business, income is chargeable at maximum marginal tax rate