Trusts have not been defined under the Income-tax Act 1961. The Dictionary meaning of ‘Trust’, in so far as it relates to the realm of law,  is ‘an arrangement’ by which property is handed over to or vested in a person, to use and dispose it off for the benefit of another person.’

Trust can be broadly classified into three categories, viz

  • Public,
  • Private
  • Public Cum Private

PRIVATE TRUST—In the case of Private Trust, the beneficiaries are individuals or families. Private trusts are further classified into:-

i. Private specific trust also referred to as Private Discretionary Trust where beneficiaries and shares of beneficiaries are determinate.

ii. Private discretionary Trust where beneficiaries and shares of beneficiaries are indeterminate.

As Per Income Tax Act 1961, the private trusts registered under the Indian Trusts Act 1882 their incomes are assessed as per Section 161(1) and 164(1). This article contains a discussion of these Sections.

 INCOME ASSESSMENT OF PRIVATE TRUSTS: – Income derived from property under a private discretionary trust is chargeable to tax as under:

CASE1: Where Shares of beneficiaries are determinate {SECTION 161}

♦ Where Trust income does not include business income [Section 161(1)]: In this case, assessments are to be made on the trustee(s) as a representative assessee under section 161. Such an assessment will have to be made at the rate applicable to the total income of each beneficiary. Accordingly, separate assessment for each of the beneficiaries on whose behalf the income is received by the trustee will have to make. However, as per section 166, the Income-tax Department has an option to make a direct assessment in the hands of each beneficiary entitled to the income. So, the beneficiary has the option either to tell his/her other incomes other than from property of trusts to the trustee or he can go for direct assessment in his/her hands.

♦ Where trust income includes business income also [SECTION 161(1A)]: In this case, where the income of beneficiary in the hands of a trustee being representative assessee consists of or includes profit and gains of business, the tax shall be charged on the whole of the income in respect of which such person is so liable at the “Maximum Marginal Rate”.

However, the maximum marginal rate in the above case shall not be chargeable if such profits and gains are receivable under a trust declared by any person by will exclusive for the benefit of any relative dependent on him for support and maintenance and such trust is the only trust so declared by him.

CASE2: Where Shares of beneficiaries are indeterminate {SECTION 164}

♦ Where Trust income does not include business income: In this case, where shares are unknown, the trustee is liable to tax as a representative assessee at the “Maximum Marginal rate”.

But the maximum marginal rate of income tax will not apply in the following cases:

I. Where none of the beneficiaries:

a. Has taxable income exceeding the exemption limit as applicable to an association of person, and

b. Is a beneficiary under any other private trust; or

II. 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

III. Where the trust, yielding the relevant income or part thereof was created before 01.03.1970 and the Assessing Officer is satisfied that is was created bonafide exclusively for the benefit of the relatives of the settlor, or where the settlor is a Hindu undivided family, exclusively for the benefit of members of such family in circumstances where such relatives or members were mainly dependant on the settlor for their support and maintenance; or

IV. Where the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bonafide by a person carrying on a business or profession exclusively for the benefit of his employees.

If the case falls within any of the above four exceptions; the relevant income or part thereof is to be taxed at the rate applicable to an association of persons (AOP/BOI) viz Basic Exemption Limit of Rs 250000/-. But in any of the above four exceptions if trust income includes profits and gains of business then income will be taxed at the “Maximum Marginal rate”, not at the normal rate applicable to AOP/BOI.

♦ Where trust income includes business income also: Where the income of such trust consists of or includes profits and gains of business, the entire income of the trust would be charged at the Maximum Marginal Rate of tax.

However, in a case where the profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependant on him for support and maintenance and such trust is the only trust declared by him, the income of the discretionary trust would be charged to tax at normal rates applicable to an AOP/BOI.

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Qualification: CA in Practice
Company: MAHAJAN JYOTI & ASSOCIATES
Location: GURDASPUR, Punjab, IN
Member Since: 25 Sep 2020 | Total Posts: 2
I am a Practising Chartered Accountant since 3 years, having varied knowledge in the field of Direct Taxation, Indirect Taxation, Auditing & Accounting and Bank Audits. View Full Profile

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