Taxation of Trust/HUF

Taxation of Trust/HUF

Trust in the normal course is referred to as the confidence which one person reposes in another person to whom he transfers the property with an obligation that the funds so generated therefrom shall be utilized for the charitable and religious purposes.

A Trust can either be a private trust or a public charitable trust. Private trusts are governed by the Indian Trusts Act (1882) and are used for private purposes, such as running a private estate or institution. Privates trusts are not given any tax benefits by the Government of India. If you want to do some charitable work for public –you can set up a public charitable trust. India does not have a national level law to govern charitable trusts. However, a few of the states have enacted Public Charitable Trusts Act (Like Bombay Public Trusts Act, 1950).

Trusts are registered using a document called TRUST DEED. This document contains all the information about the Trust and is printed/written/typed on plain A4 size papers. Along with these papers you would need to attach a Rs. 100 Non-Judicial stamp paper (which you can get from a notary). All the Trustees and witnesses will have to give thumb impressions and signatures on these papers. All in all, you will need help of a notary to prepare the papers.

Most important part of the Trust Deed that you should pay special attention to is objectives of the trust. You should be as thorough as possible in writing down trust objectives so that you can function smoothly without any problems.

  • Name and address of the Settler (Settler is the person who is setting up trust)
  • Name(s) and address(es) of the other trustees
  • Name of the trust
  • Minimum and maximum number of trustees your trust can have
  • Address of the registered office of the trust
  • Objectives of the trust
  • Rules and Regulations of the trust.
  • For registering a trust, you need minimum two trustees (i.e. one settler and another person). You can decide the maximum number of trustees and this number must be mentioned in the trust deed. All the trustees together are called Board of Trustees. This board collectively governs the trust.
  • Unlike societies, in case of trusts all or some of the trustees can be related persons (i.e. they may belong to the same family).
  • There no difference between a trust and a foundation.

Trusts are created when the settlor of the property transfers a property to the trustees for its usage in the public purposes.

Four essential conditions are necessary to bring into being a valid trust.

  • The person who creates a trust (settlor) should make an unequivocal declaration binding on him.
  • He must transfer an identifiable property under irrevocable arrangement and totally divest himself of the ownership and the beneficial enjoyment of the income from the property.
  • The objects of the trust must be defined and specified.
  • The beneficiaries are specified.

The income of the wholly religious trusts shall be exempt from income tax. The income of a private religious trust not ensuring to the benefit of the public at large shall not be exempt from tax.

The essential distinction between a public and a private endowment (trust) is that the beneficial endowments vests in an uncertain and a fluctuating body of the persons either the public at large or some considerable portion of it answering a particular description. On the other hand, in a private endowment the beneficiaries are definite and ascertained individuals.

Trusts have an option of accumulating (setting apart), some of the funds received from the voluntary contributions, in every previous year, for certain purposes.

The tax advantage is that the part of the contributions so set apart for the accumulation shall never be considered as the income for the previous year; accordingly, the expandable amount for the charitable purposes shall be reduced.

The Trust(s) is required to apply in Form 10 under the Income Tax Rules specifying the objects for which the accumulated sums shall be applied. The filing shall be within the time allowed for the filing of its income tax return.

Whether stating general purposes will suffice, or specific objects are required to be stated, has been a subject of dispute and different courts have adopted different stands.

Following incomes are not to be included in the income of the trusts /society:

  • Income derived from the property held under trust wholly for the charitable and religious
  • purposes actually spent in these purposes in India.
  • Income set apart to the extent it does not exceed 25% of the total income from the property.
  • In case of trusts created before 1/4/61, the income derived from the property held under trust partially for the charitable and religious purposes which has been actually spent in India.
  • In the above case, the income being set apart to the extent not exceeding 25% of the income from such property.
  • The income as derived by a trust created after 1/4/52 and spent outside India for the charitable purposes. These trusts shall be specified by the CBDT.
  • In case of the trusts created before 1/4/52, the income is allowed to be spent outside India for the charitable and religious purposes.
  • Income by way of voluntary contributions towards the corpus of the trust.

As per certain case laws, when a Charitable Trust donates its income to another Charitable trust, the provision of Sec. 11(1)(a) relating to the application of income to that extent can be said to have been met.

Please Register To view Our Price List

Our Brochures