Summary: Private trusts under the Income Tax Act, 1961, are legal arrangements governed by the Indian Trust Act, 1882, created for specified beneficiaries. They operate until a defined purpose is met, a specific event occurs, or the identified beneficiaries pass away. There are two main types: Definite Trusts (or Specific Trusts) and Discretionary Trusts. In a Definite Trust, the beneficiaries’ shares are determined. Income from such trusts is taxable in the trust’s hands as a representative assessee, at the rate applicable to each beneficiary, or it can be assessed directly in the beneficiaries’ hands. If a definite trust’s income includes business profits, it’s generally taxed at the maximum marginal rate, except for trusts declared by a will exclusively for dependent relatives. A Discretionary Trust exists when beneficiaries’ shares are indeterminate. These trusts are typically taxed at the maximum marginal rate. However, exceptions apply, such as when no beneficiary has other taxable income exceeding a certain limit, when the trust is declared by a will and is the only trust so declared, or for certain older trusts created for dependent relatives. Trusts benefiting employees’ provident, superannuation, or gratuity funds are also exempt from the maximum marginal rate. If a discretionary trust includes business profits, the maximum marginal rate generally applies, with a specific exception for trusts declared by will for dependent relatives, provided it’s the sole trust declared by that will.
Under Income Tax Act, 1961 different types of trusts are define under different sections. Following is the list:
01. Private Trusts Sections 161, 164 & 166
- Definite Trust
- Discretionary Trust
02. Oral Trusts Sections 160(1)(v) and 164A
03. Charitable or Religious Trusts
Sections 11, 12, 12A, 12AA, 12AB, 13, 115BBC & 115TD to 115TF
04. Business Trust Sections 2(13A), 2(42A), 10(23FCA), 10(23FD), 10(38), 47(xvii), 49(2AC), 111A (1), 115A (1), 115UA, 139(4E), 194A (3)(vi), 194LBA and 194LC(1)/(2).
What is a Private Trust?
A private trust is created under the Act for specified individuals or beneficiaries identified in the trust deed. A private trust is a legal arrangement govern by the Indian Trust Act, 1882. It serves a defined purpose and concludes either upon achieving that purpose, the occurrence of specified event, or the death of the identified beneficiaries, as outlined in the trust instrument. There are main two types of trusts:
Definite Trust or Specific Trust:
Which type of trust is to be consider as Definite Trust? In the case of a trust where the shares of the beneficiaries are determinate or known to each other is known as Definite Trust. The income falling to the share of each beneficiary is liable to tax in the hands of trust under section 161, as a representative assesse, at the rate applicable to each beneficiary. However, under section 166 of the Act, there is no bar to such share of income from the trust being assessed in the hands of the respective beneficiaries.
Section 161(1A) of the Act, provides that, a definite trust will be liable to taxed at the maximum marginal rate if the income of such trust consists of, or includes, profit and gain of business.
However, the maximum marginal rate will not apply in a case where the profits and gains of business are receivable under a trust declared by a person through WILL. This WILL is prepared exclusively for the benefit of any relative dependent on him, for support and maintenance. Please remember that this is the only trust, declare by WILL. Under the WILL only one trust is to be declared.
Discretionary Trust:
A trust is regarded as “discretionary trust” if the income or any part thereof is not specifically received on behalf of, or for the benefit of, any one person or where the individual shares of the beneficiaries are indeterminate or unknown.
Discretionary Trust is liable to tax under section 164 of the Act at maximum marginal rate. (30% I.T., plus s. c. on I.T. if any plus Additional s. c.)
The Maximum Marginal Rate of tax will not apply under following circumstances:
(1) Where none of the beneficiaries has any other income chargeable under the Income Tax Act exceeding the maximum amount not chargeable to tax in the case of association of persons, and none of the beneficiaries is beneficiary under any other trust; or
(2) Where 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 was created before 1st March, 1970 by a non-testamentary instrument exclusively for the benefit of the relatives of the settlor mainly dependent on him for their support and maintenance; or
(4) 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 the benefit of persons employed in the business or profession.
The provisions section 167B applicable association of person, which provides for tax at maximum marginal rate will not apply to cases vide Circular No 577 dated 4th October, 1990 180 ITR 49.
However, if the relevant income consists of, or includes, profits and gains of business, exceptions specified in (1) to (4) above will not apply unless such profits and gains are receivable under a trust declared by any person by WIIL exclusively for the benefit of any relative dependent upon him for support and maintenance and such trust is the only trust so declared by him. Barring this exception, tax will be charged at the maximum marginal rate on the whole income of the trust if any of its income consists of, or includes, profits and gains of business [2nd Proviso to section 164(1)].
Author Bio
