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LEGAL CHAT
Tax on private trusts
N.C.S. RAGHAVAN
ARVIND RAGHAVAN
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Trustee is an assessable entity under Section 160 of the Income Tax Act
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For the purposes of taxation on private trusts under the Income Tax Act 1961, the following points are highlighted:The trust by itself is not a legal entity, but only a legal relationship giving rise to a legal obligation attached to the trust property. So the trust as such is not made an assessable entity.
The trustee is made an assessable entity under Section 160 of the Income Tax Act, 1961.
The trustee, as the representative assessee, will be assessed separately for the income derived by each beneficiary under the trust at the rates applicable.
For the purposes of taxation, a private trust is divided into the following categories:
Oral trust: The income of such a trust will be taxed at the maximum marginal rate in the hands of the trustee acting as a representative assessee. The term “maximum marginal rate” is defined in Section 2 (29c) of the Income Tax Act, 1961, to mean and refer to the rate of income tax (including all applicable surcharges) applicable in relation to the highest slab of income in the case of individuals, association of persons (AOP) or body of individuals (BOI) as specified in the Finance Act of the relevant years. At present, the rate of taxation of an AOP is 33.99 per cent (including surcharge and cess).
Trust with a business income: In the case of a trust declared and registered under an instrument of trust, which has a business income also, the rate of tax applicable is the maximum marginal rate as indicated above.
Discretionary trust: Where in the aforesaid trust, even though there is no business income, when the shares of the beneficiaries are not definite or not known and their shares are left to the discretion of the trustee, the rate of tax applicable is the maximum marginal rate as indicated above. The above category of trust is popularly known as a “discretionary trust.”
Non-discretionary trust with definite shares with no business income: Where a private trust has no business income and the shares of each of the beneficiaries are definite and known, then, for each beneficiary the trustee will be assessed separately as a representative assessee at the normal rates applicable separately on the share income of each beneficiary under a separate and independent assessment.
A trustee acting as a representative assessee in respect of any income of the trust assessed at rates mentioned above, shall have the same duties, responsibilities and liabilities to pay the tax assessed as if it is his own total income. However, the trustee as the representative assessee has the right to recover the full amount of tax so paid by him from the trust or the beneficiary for whom he acts as a representative assessee (vide Section 161 of the Income Tax Act, 1961).
(N.C.S. Raghavan is a chartered accountant and Arvind Raghavan, an advocate)
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