Many Indians establish trust funds for family member support, wealth management, or charitable activity. The operation of taxes on trust funds, however, is not well understood. Know the tax laws whether you intend to create a trust or are a beneficiary.
What is a trust fund?
A trust fund is a legal arrangement whereby one or more people (called beneficiaries) benefit from property or money given by a settlor to a trust under management by a trustee. One can design it for personal, family, or charitable uses.
Trusts come in several varieties:
- Individual confidence: for particular people or relatives
- Public trust: For the advantage of the whole society
- Mixed trust: Exists public as well as personal aspects.
How are trust fund taxes charged?
The kind of trust and its structure determine the method of charge for taxes on trust funds.
- Private Foundations
Should the trust be for particular individuals and income be shared among them, the income is taxed in the hands of those recipients.
Whether the trust is discretionary or non-discretionary, the income may be taxed at either maximum marginal rate (MMR) or the same rate as individuals should it remain in the trust.
- Discretionary trust: The trustee chooses who gets what.
- Non-discretionary trust: Beneficiaries’ fixed shares
- Discretionary trust: The trustee chooses who gets what.
- Public confidence
Should public charitable trusts register under the Income Tax Act (Section 12A and 80G), they receive tax advantages. They have to:
- Spend 85% of their income for charitable causes.
- Keep correct accounts.
- Not directly advantage a particular individual
- Spend 85% of their income for charitable causes.
- Taxes on trust funds are levied at regular or higher rates if the trust doesn’t comply with the law.
Tax Rates for Trusts
- Trusts registered as charities: Exempt, should the requirements be satisfied
- Particularly private trusts taxed at individual rates
- Usually taxed at the maximum marginal rate (now 30% plus surcharge), discretionary trusts
Important Points on Taxes on Trust Funds
- Trust has to annual file an income tax return.
- One needs PAN for the trust.
- Income could call for a tax audit.
- Beneficiaries, should they be taxed in their name, must report income.
In conclusion
You can avoid legal problems and make better plans by understanding taxes on trust funds. Whether your trust is being established or you are a beneficiary, it is always advisable to have clear records and grasp the fundamental tax laws. See a CA who knows trust taxation in India to get advice when in doubt.