With the introduction of e-filing, income tax return compliance for private trusts has become more structured. However, trustees often face confusion regarding:
- The correct method of tax computation
- Whether beneficiaries are determinate or indeterminate
- Applicable tax rates
- Whether to file in representative capacity
This guide explains taxation for different types of private trusts under Indian tax law.
1️⃣ Taxation When Beneficiary Shares Are Determinate (Specific Trust)
When the shares of beneficiaries are clearly defined in the trust deed, the trust is called a private specific trust.
🔹 How is tax calculated?
- Income is assessed either:
- In the hands of the trustee as a representative assessee, or
- Directly in the hands of the beneficiaries.
- Tax is charged at the rate applicable to each beneficiary’s total income.
🔹 Special Case – Business Income
If the trust income includes profits and gains from business (PGBP):
- The entire income is taxed in the hands of the trustee at the Maximum Marginal Rate (MMR).
🔹 Exception to MMR
MMR does not apply if:
- The trust is created by a person solely for the benefit of a dependent relative, and
- It is the only trust declared by that person.
2️⃣ Taxation When Beneficiary Shares Are Indeterminate (Section 164)
If beneficiary shares are unknown or discretionary, Section 164 applies. Such trusts are called private discretionary trusts.
🔹 Trustee’s Liability
The trustee is taxed as a representative assessee.
🔹 If Income Includes Business Income:
- Entire income is taxed at Maximum Marginal Rate (MMR).
- Exception: If created solely for dependent relatives and is the only trust declared.
🔹 If Income Does NOT Include Business Income:
- Income is taxed at Maximum Marginal Rate (MMR).
3️⃣ Taxation of Private Specific Trust
Tax is calculated similarly to individuals:
- Slab rates applicable after deductions and set-off of losses.
- Each beneficiary gets benefit of slab rates.
- If multiple beneficiaries, slab benefit applies individually.
🔹 Where Trust Has Business Income
General rate: 30% + surcharge + cess
However, slab rates apply if ALL the following conditions are satisfied:
- Trust is created through a will.
- Created exclusively for support and maintenance of a dependent relative.
- It is the only trust declared by the settlor.
If more than one beneficiary exists, only one return is filed by the trustee in representative capacity.
4️⃣ Taxation of Private Discretionary Trust
✅ If Income Does NOT Include Business Income:
General rate: 30% + surcharge + cess
Slab rate applies only if:
- None of the beneficiaries:
- Has taxable income above the basic exemption limit
- Is a beneficiary under any other private trust
OR
- Trust declared by will and is the only trust declared
- Trust created before 1-3-1970 for dependent relatives (bona fide)
- Trust income is for employee benefit funds (PF, gratuity, pension etc.)
✅ If Income Includes Business Income (PGBP):
General rate: 30% + surcharge + cess
Slab rate applies only if:
- Trust created through a will
- Exclusively for dependent relatives
- Only trust declared by settlor
Only one return is filed by the trustee in representative capacity.
Key Takeaways
- Specific Trust (Determinate shares) → Taxed at beneficiary slab rates (subject to business income rules).
- Discretionary Trust (Indeterminate shares) → Generally taxed at Maximum Marginal Rate.
- Business income often triggers taxation at higher rates.
- Trustee files return as representative assessee.
Disclaimer: The materials provided herein are for informational purposes only and do not constitute legal, financial, or professional advice. Consult relevant laws and experts before acting on this information. Neither the author nor Jethani & Associates is liable for any inaccuracies or omissions. This material is purely educational and not an advertisement or solicitation.
FAQs
1. What is a private trust under Indian law?
A private trust is a trust created for the benefit of specific individuals (beneficiaries), unlike a public charitable trust which benefits the general public. Private trusts are governed by the Indian Trusts Act 1882.
2. How is a private trust taxed under the Income Tax Act?
Private trusts are taxed under the Income Tax Act 1961 either in the hands of the trustee (as a representative assessee) or directly in the hands of beneficiaries, depending on the type of trust.
3. What is the difference between a specific trust and a discretionary trust?
- Specific (Determinate) Trust: Shares of beneficiaries are clearly defined. Income is taxed at the applicable individual slab rates of beneficiaries.
- Discretionary (Indeterminate) Trust: Beneficiaries’ shares are not defined. Income is generally taxed at the maximum marginal rate (MMR).
4. Who is liable to pay tax in a private trust?
The trustee is taxed as a representative assessee on behalf of the beneficiaries, but tax liability is essentially on the income attributable to beneficiaries.
5. Is a private trust required to obtain a PAN?
Yes. A private trust must obtain a separate PAN and file income tax returns if it earns taxable income.
6. What is the tax rate applicable to a discretionary private trust?
Income of a discretionary trust is typically taxed at the maximum marginal rate, unless specific exceptions apply under the Income Tax Act.
7. Are capital gains of a private trust taxable?
Yes. Capital gains earned by a private trust are taxable according to applicable capital gains provisions under the Income Tax Act.
8. Is income distributed to beneficiaries taxed again?
Generally, if tax has already been paid at the trust level, income is not taxed again in the hands of beneficiaries to avoid double taxation.
9. Are private trusts eligible for tax exemptions under Section 12A or 80G?
No. Tax exemptions under Sections 12A and 80G are typically available only to charitable or religious trusts, not private trusts created for specific individuals.
10. Is audit mandatory for a private trust?
Audit requirements depend on the nature and amount of income. If the trust has business income exceeding prescribed limits, audit under Section 44AB may be applicable.
11. Can a private trust carry on business activities?
Yes, but business income of a discretionary trust is usually taxed at the maximum marginal rate unless specific conditions are satisfied.
12. Should professional advice be taken for private trust taxation?
Yes. Private trust taxation involves complex provisions, especially regarding distribution, clubbing, and maximum marginal rate taxation. Professional guidance ensures proper compliance and tax efficiency.
