Article explains Taxation of Private Trusts and Applicable Tax Rates When the shares of the individual beneficiaries are determinate, When the individual shares of the beneficiaries are indeterminate or unknown and maximum marginal rate of tax is not applicable
Taxation of Private Trust When the shares of the individual beneficiaries are determinate:-
a. 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.
b. 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.
Taxation of Private Trust When the individual shares of the beneficiaries are indeterminate or unknown [under section 164]:-
a. Trustee(s) is liable to tax as a representative assesses.
b. 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.
c. 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) :-
a. 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
b. 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
c. 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
d. 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.
Also Read: https://taxguru.in/income-tax/creation-taxation-private-trusts.html
(Republished With Amendments)
