Tax Planning by Private Trust

Introduction: The return filing under Indian income tax has under gone sea change after the introduction of efiling. The major problem faced by most of the assessees, being a private trust, is how to file their tax return, inter alia, the type of form and whether to efile or not. The authors have tried to itemize the various ways to combat tricky situations while filing the tax returns for private trust. The readers can go through the below given FAQs to help themselves while filing the return for PRIVATE TRUSTS.

Article Index:
1. Types of private trusts for the purpose of return filing.
2. Type of return for private trusts for efiling/manual filing
3. Tax rate applicable for trusts mentioned above.
4. Is PAN mandatory for private trusts? How to obtain PAN for private trust?
5. How to calculate tax in the case of private specific trusts and whether more than 1 return has to be filed, in the case of multiple beneficiaries, by the trustee(s)?
6. How to compute tax in case of private discretionary trust?
7. Whether a private trust can accept gifts from related and unrelated persons and whether trust property is taxable in the hands trustee as gift when the same is transferred to the trust?
8. Tax status-when a trust is revocable, irrevocable and revoked?
9. Whether a settlor can transfer trust income, without transferring the trust property?
10. Tax treatment in the hands of settlor-when property is transferred by him to the trust?
11. Minor and private trust-tax consequences?
12. Spouse and private trust-tax consequences?
13. Daughter-in-law and private trust-tax consequences?
14. Is private trust a real tax planning tool? MUST READ
15. Whether private trust can claim deductions u/c VIA?
16. More FAQs?
1. Types of private trusts for the purpose of return filing.

2. Type of return for private trusts for efiling/manual filing-for AY 2012-13.

Imp. Note: for income tax purposes a private trust is treated as individual.

Sl. No	Form no.	conditions
1.	ITR no. 1-sahaj	This return form is to be used by the Individual whose total income for the Assessment Year 2012-13 includes1. Income from salary/pension :or2. Income from one house property(excluding where loss brought forward from previous year):or3. Income from other sources( excluding winnings from lottery and income from races horses)
2.	ITR 2-not for business and profession income	This Return Form is to be used by an individual or an Hindu Undivided Family whose total income for the assessment year 2012-13 includes:-(a) Income from Salary /Pension ; or(b) Income from House Property; or(c) Income from Capital Gains; or(c) Income from Other Sources (including Winning from Lottery and Income from Race Horses).
3.	ITR – 4	For individuals and HUFs having income from a proprietary business or profession and income under other heads

Press note/release
Rule 12 of the Income-tax Rules, 1962 mandates that an individual or Hindu undivided family, if his or its total income or the total income in respect of which he is or it is assessable under theAct, during the previous year, exceeds ten lakh rupees, shall furnish the return electronically for the assessment year 2012-13 and subsequent assessment years.

It has been brought to the notice of the Board that the s in agents of non-residents, within the meaning of section 160(1) (i) of the Income –tax Act, are facing difficulties in electronically furnishing the returns of non-residents. This is because there may be more than one agent of the non-resident in India for different transactions or a person in India may be an agent of more than one non-resident. Such situations are not covered by the existing e-filing software which functions on the principle of one assessee-one PAN-one return.
It has also been brought to the notice of the Board that ‘private discretionary trusts’ having total income exceeding ten lakh rupees are facing problems in filing their return of income electronically in cases where they are filing their return in the status of an individual. This is because status of a private discretionary trust has been held in law as that of an ‘individual’. The existing e-filing software does not accept the return of a private discretionary trust in the status of an ‘individual’.
Accordingly it has been decided by the Board that:
(i) it will not be mandatory for agents of non-residents, within the meaning of section 160(1) (i) of the Income –tax Act, if his or its total income exceeds ten lakh rupees, to electronically furnish the return of income of non-residents for assessment year 2012-13;
(ii) it will not be mandatory for ‘private discretionary trusts’, if its total income exceeds ten lakh rupees, to electronically furnish the return of income for assessment year 2012-13.
DSM/SS/Hb (Release ID :85615)
Note: in our opinion, the intent of the department is to exclude private trusts of both types from efiling be it discretionary or specific trust for the ay 12-13

3. Tax rate applicable for trusts mentioned above.

See the diagram below for better understanding:

Notes:
Point 1: in the following case rates applicable to Individuals will be charged:

• If the trust has been declared by way of a will from which business income is derived; and
• It is exclusively declared for the benefit of any relative dependent on the settlor for support and maintenance; and
• The trust is the only trust so declared by the settlor.

Point 2: in the following cases rates applicable to Individuals will be charged:
1. Where none of the beneficiaries

• Has taxable income exceeding 180000.00/1,90,000/250000 for ay 12-13
• Is a beneficiary under any other private trust; or

2. Where the relevant income or part of the 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
3. Where the trust yielding the relevant income or part thereof was created by a non-testamentary instrument before 1-3- 1970 and the A.O. is satisfied that it was created bona fide for the benefit of the dependant relatives of the settlor, or where the settlor is HUF, exclusively for the benefit of the dependant members.

4. Where the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund or pension fund or any other fund created bona fide by a person carrying on a business or professional exclusively for the benefits of his employees.
Tax treatment of settlor / grantor

• If the trust effectively alienates income from the settlor/grantor, income tax liability thereon shall stand transferred to the trustee(s).
• However, the settlor/grantor continues to be liable to income tax on income from the settled property to the extent that it is for the immediate or deferred benefit of a spouse or minor child.
• Stamp duty is payable on the transfer of immovable property.

4. Is PAN mandatory for private trusts? How to obtain PAN for private trust.
Yes, the private trust needs to apply for PAN in order to file the ITR. The PAN application can be made to a specified authority along with the following documents;

1. Address proof

2. Bank a/c of the private trust.

3. Trust deed

5. How to calculate tax in the case of private specific trusts?

1. The tax in the case of private specific trusts is to be calculated in the same way as calculated for individuals slab rate starting from Rs. 1,80,000.00 (in our opinion the slab should depend upon the beneficiaries status-if the trust has solo beneficiary)after allowing all deductions and set-off of losses.

2. If there is more than one beneficiary, then the slab should start from Rs.1 80,000.00.

3. However, where the trust has business income, the rate applicable will 30%+3%, however, if the following three conditions are met cumulatively, the tax rate will be slab rate:

• If the trust has been declared by way of a will from which business income is derived; and
• It is exclusively declared for the benefit of any relative dependent on the settlor for support and maintenance; and
• The trust is the only trust so declared by the settlor.

4. In case of more than one beneficiary, only one return will be filed by the trustee(s) in the representative capacity.
6. How to calculate tax in the case of private discretionary trusts?

a. If income does not includes Profit & Gain From Business & profession (PGBP) income-
i. General rate-30%+3% (EC)
ii. . Slab rate if the following conditions are satisfied:

• Where none of the beneficiaries

- Has taxable income exceeding 180000.00/1,90,000/250000 for ay 12-13

- Is a beneficiary under any other private trust; or

• Where the relevant income or part of the 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

• Where the trust yielding the relevant income or part thereof was created by a non-testamentary instrument before 1-3-1970 and the A.O. is satisfied that it was created bona fide for the benefit of the dependent relatives of the settlor, or where the settlor is HUF, exclusively for the benefit of the dependent members.
• Where the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund or pension fund or any other fund created bona fide by a person carrying on a business or professional exclusively for the benefits of his employees.

b. If income includes PGBP income-
i. General rate-30%+3%
ii. Slab rate if the following conditions are satisfied:

• If the trust has been declared by way of a will from which business income is derived; and
• It is exclusively declared for the benefit of any relative dependent on the settlor for support and maintenance; and
• The trust is the only trust so declared by the settlor.

iii. In case of more than one beneficiary, only one return will be filed by the trustee in the representative capacity.

7. Whether a private trust can accept gifts for related and unrelated persons and whether trust property is taxable in the hands trustee as gift when the same is transferred to the trust?
Generally speaking a trust is created by a person the watch interests of his “relatives “, hence in majority of cases the tax shall not be chargeable in case property gifted/transferred, whether movable or immovable, as per section 56(2)(vi) and 56(2) (vii) in the hands of the transferee.

56 (2) [(vi)

[(vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006 [but before the 1st day of October, 2009], the whole of the aggregate value of such sum:

Provided that this clause shall not apply to any sum of money received—

(a) from any relative; or

(b) on the occasion of the marriage of the individual; or

(c) under a will or by way of inheritance; or

(d) in contemplation of death of the payer; or

(e) from any local authority as defined in the Explanation to clause (20) of section 10; or

(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or

(g) from any trust or institution registered under section 12AA.

Explanation.—For the purposes of this clause, “relative” means—

(i) spouse of the individual;

(ii) brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;

(iv) brother or sister of either of the parents of the individual;

(v) any lineal ascendant or descendant of the individual;

(vi) any lineal ascendant or descendant of the spouse of the individual;

(vii) spouse of the person referred to in clauses (ii) to (vi);]

[(vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009,—

(a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;

[(b) any immovable property, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;]

(c) any property, other than immovable property,—

(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration :

Provided that where the stamp duty value of immovable property as referred to in sub-clause (b) is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub-clause (b) as they apply for valuation of capital asset under those sections :

Provided further that this clause shall not apply to any sum of money or any property received—

(a) from any relative; or

(b) on the occasion of the marriage of the individual; or

(c) under a will or by way of inheritance; or

(d) in contemplation of death of the payer or donor, as the case may be; or

(e) from any local authority as defined in the Explanation to clause (20) of section 10; or

(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or

(g) from any trust or institution registered under section 12AA.

Explanation.—For the purposes of this clause,—

(a) “assessable” shall have the meaning assigned to it in the Explanation 2 to sub-section (2) of section 50C;

(b) “fair market value” of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed;

(c) “jewellery” shall have the meaning assigned to it in the Explanation to sub-clause (ii) of clause (14) of section 2;

(d) “property” [means the following capital asset of the assessee, namely:—]

(i) immovable property being land or building or both;

(ii) shares and securities;

(iii) jewellery;

(iv) archaeological collections;

(v) drawings;

(vi) paintings;

(vii) sculptures; [***]

(viii) any work of art; ¹[or]

[(ix) bullion;]

[(e) "relative" means,—

(i) in case of an individual—

(A) spouse of the individual;

(B) brother or sister of the individual;

(C) brother or sister of the spouse of the individual;

(D) brother or sister of either of the parents of the individual;

(E) any lineal ascendant or descendant of the individual;

(F) any lineal ascendant or descendant of the spouse of the individual;

(G) spouse of the person referred to in items (B) to (F); and

(ii) in case of a Hindu undivided family, any member thereof;]

(f) “stamp duty value” means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;]

8. Tax status-when a trust is revocable,irrevocable and revoked.

Sl.No.	Particulars	Consequences
1	Where the trust is revocable from the beginning.	The income from trust income will be taxable in the hands of the settlor from inception section 61
2.	When the trust is irrevocable for a specified period under section 62	During the period the trust was not revocable, the trustee shall be liable to pay tax in representative capacity.
3.	When the trust, which was irrevocable gets revoked due to death of the beneficiary(ies)	The property will get back to the settlor or any other person specified in the trust deed or the legal inheritor of the property and he shall be liable to pay tax on the income from such property from the date of transfer.

61- REVOCABLE TRANSFER OF ASSETS.

All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income.

62- TRANSFER IRREVOCABLE FOR A SPECIFIED PERIOD.
(1) The provisions of section 61 shall not apply to any income arising to any person by virtue of a transfer -
(i) By way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other transfer, which is not revocable during the life time of the transferee; or
(ii) Made before the day of April, 1961, which is not revocable for a period exceeding six years :
Provided that the transferor derives no direct or indirect benefit from such income in either case.
(2) Notwithstanding anything contained in sub-section (1), all income arising to any person by virtue of any such transfer shall be chargeable to income-tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income.
Section 63- “TRANSFER” AND “REVOCABLE TRANSFER” DEFINED.

For the purposes of sections 60, 61 and 62 and of this section, -

(a) A transfer shall be deemed to be revocable if -

(i) It contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or

(ii) It, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets;

(b) “Transfer” includes any settlement, trust, covenant, agreement or arrangement

9. Whether a settlor can transfer trust income, without transferring the trust property.

TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SEC. 60)

Section 60 is applicable if the following conditions are satisfied:

1. The taxpayer owns an asset

2. The ownership of asset is not transferred by him.

3. The income from the asset is transferred to any person under a settlement or agreement.

If the above conditions are satisfied, the income from the asset would be taxable in the hands of the transferor i.e. the settlor.

10. Tax treatment in the hands of settlor-when property is transferred by him to the trust? Transfer of capital assets – section 47(iii) of the Income Tax Act, 1961 any transfer of a capital asset under a gift or will or an irrevocable trust is not regarded as transfer and hence not subjected to capital gain tax. If a person settles any property under an irrevocable trust, then he is not required to pay any capital gain tax on such transfer.

11. Minor and private trust-tax consequences? INCOME OF MINOR CHILD (SEC. 64 (1A))

• All income which arises or accrues to the minor child shall be clubbed in the income of his parent (Sec. 64(1A), whose total income (excluding Minor’s income) is greater.
• However, in case parents are separated, the income of minor will be included in the income of that parent who maintains the minor child in the relevant previous year.
• Thus, in case of private trusts where minors are beneficiaries and their parents are alive, then the income from trust property will be clubbed in the hands of the parents as mentioned above.

12. Spouse and private trust-tax consequences?
INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SPOUSE [SEC. 64 (1) (VII)]
Income from assets transferred to a person for the benefit of spouse attract the provisions of section 64 (1) (vii) on clubbing of income. If:

• The taxpayer is an individual.
• He/she has transferred an asset to a person or an association of persons.
• Asset is transferred for the benefit of spouse.
• The transfer of asset is without adequate consideration.

In case of such individuals income from such an asset is taxable in the hands of the taxpayer who has transferred the asset. Thus where a person intends to transfer any property to a trust for the benefit of his/her spouse, then the income shall be clubbed in the hands of the transferor.

13. Daughter-in-law (son’s wife) and private trust-tax consequences?
INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE [SEC. 64 (1) (VIII)]
Income from assets transferred to a person for the benefit of son’s wife attract the provisions of section 64 (1) (vii) on clubbing of income. If,

• The taxpayer is an individual.
• He/she has transferred an asset after May 31, 1973.
• The asset is transferred to any person or an association of persons.
• The asset is transferred for the benefit of son’s wife.
• The asset is transferred without adequate consideration. In case of such individual, the income from the asset is included in the income of the person who has transferred the asset.

14. Is private trust a real tax planning tool?
In most of the cases people are confronted with the issue as to whether private trust is at all a tax saving tool in the hands of the tax payer (consider the time, money and energy spent on creating the private trust).
Is it at all worth creating a private trust?

In our opinion, the biggest misconception in the minds of people is that by creating multiple private trusts for a single beneficiary, the tax can be saved by each trust by claiming tax as per the tax slab.
Consider the following example: Mr. X has 4 properties and he has one son “Y” of 20 years of age. He wants to create private trust for his son. He creates 4 private trusts in order to claim basic exemption

• Total income from all the properties: Rs. 6,60,000.00 Actual tax +EC for AY 12-13 (for male below the age of 60 years) 65,920.00
• Now, Mr. X believes that by creating for 4 trusts he can save Rs. 65,920.oo tax.
• However, it may be clearly mentioned here the A.O. has the has the option to make the assessment directly on the beneficiaries as per section 166.
• In our opinion, a private is only a protection tool as against the tax planning tool. It can be used to protect the interests of the beneficiaries, but the beneficiaries have to pay the legitimate tax, which is otherwise payable by them in case they were not shielded by the private trust.

15. Whether private trust can claim deductions u/c VIA? Yes, a private trust which invests/incurs expenditure on behalf of the beneficiary is eligible to claim deduction u/c VIA and further is also eligible for set-off and carry-forward of losses.

16. More FAQs

1. Whether a settlor can have more than one private trust?
Yes, a settlor can have more than 1 private trust. This depends on his tax planning.
2. How immovable property is to be transferred to the private trust?
The property is transferred by a duly registered transfer deed/trust deed. The stamp duty is applicable. Please contact your local civil lawyer to know more on this.
3. Whether registration is necessary even if the settlor owns the property?
Yes, but only in the case of property being immovable property.
4. Whether immovable property is to be transferred in the name of only one trustee (where more than one trustee is present in one trust)?
The trust is a juridical artificial person and the trust property will be transferred to the trust and the property will be managed by the trustee. The name of the trustee (s) will appear on the deed of transfer in representative capacity
5. If the private trust is for a sole beneficiary (single beneficiary) but trustees are more than 1, then who will be liable for income tax as representative assesse?
The person who is the managing/head trustee or any trustee authorized in this behalf by the board of trustees

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