Taxation of Family Trusts and Foreign Trusts in India
CA. Divakar Vijayasarathy
DVS Advisors LLPIndia-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com
Presentation Schema
Understanding Trusts
Trust Regulations
Parties to Trust Constituents of
Family Trust
Types of TrustsWhy to Form a
Family TrustFormation of Family Trust
Taxation of Family Trusts
Foreign Trusts and its Taxation
CaveatsJudicial
PrecedentsPractical Issues and Questions
Trusts??
Understanding Trusts
• A legal obligation annexed to the ownership of the property
• Confidence reposed by settlor in trustee for the benefit of beneficiaries
• Fiduciary arrangement between the parties of trust
• Not a separate legal entity
• Beneficiaries being relatives of settlor – “Family Trusts”.
Trust Regulations
• Formation and Functioning - Indian Trust Act, 1882
• Focuses majorly on Private trusts
• Extends to whole of India except the State of Jammu & Kashmir and Andaman & Nicobar Islands
• Not applicable to Waqf (Muslim endowment to a religious or charitable cause), HUFs, charitable endowments
governed by special legislations
Allied Legislations
• The Indian Trusts Act, 1882
• The Constitution of India
• The Code of Civil Procedure, 1908
• The Indian Stamp Act, 1899 as amended by the relevant State Governments
• The Specific Relief Act, 1963
• The Limitation Act, 1963
• The Income Tax Act, 1961
Parties to Trust (Sec 3)
BeneficiariesPerson for whose benefit the confidence is accepted
TrusteePerson who accepts the confidence and is responsible to implement the settlor’s
intentions
SettlorPerson who reposes or declares the confidence in trust
Constituents of Family Trust (Sec 6)
Requirements of Valid Trust
Intentions of settlor to create a trust
The trust property
Purpose of the trust
Beneficiaries (relatives of settlor)
Types of Trusts
• Discretionary Trust – Trustee having complete discretion
• Non-discretionary Trust – Share of beneficiaries are clearly defined
Private Trust – for benefit of specific individuals
• Charitable Trust – Charity and charitable intent, serving “public purpose”Public Trust – benefit for general
public at large
• Revocable Trust – Settlor can revoke anytime
• Irrevocable Trust - Cannot be revoked after creation
Non-testamentary Trust - effective on occurrence of specific event
• Trust created by a testamentary instrument, effective only after the death of the settlorTestamentary Trust
• Constructive Trusts – Imposed by court to avoid unjust enrichmentImplied Trust - created by act and
conduct of Parties
• Trust created in express terms embodied in trust deedExpress Trust
Why to Form a Family Trust
Benefits of relatives
Protecting own interest
Preventing alienation of
properties
Peaceful distribution
of estate
Formation of Family Trust
Identification of Trustee and Beneficiaries
• List of relatives by settlor
Identification and Transfer of
Asset
• Movable as well as immovable properties
• Separate procedures for every class of asset
• Transfer of immovable property – trust deed mandatory (Sec 5)
Preparation and Validation of Trust Deed
• Deed containing points of acknowledgement of trust properties, objects, tenure, consequences in case of death of trustee, etc
• Executing on stamp paper, signature of witnesses, submission with Local Registrar
Practical Relevance of Family Trusts
• Wealth Management
• Tax Planning
• Estate Planning
• Consolidation of family assets
• Prevention of future alienation of family assets
• Realignment of family assets
Taxation of Private Specified Family Trust (Section 161(1) and 161(1A))
Trust income
Includes business income
Whole income at MMR
At rate of AOP if:-
- Trust created through will and
- Exclusively for dependent relative and
- Only trust created by settlor
Does not includes business income
Taxable in the hands of trustee –rate applicable to each beneficiary
shall apply to income of trust. (Section 166) Alternatively, AO can
assess income in the hands of beneficiaries
Taxation of Private Discretionary Family Trust (Sec 164(1))
Trust income
Includes business income
At rate of AOP if:-
- Trust created through will and
- Exclusively for dependent relative
and
- Only trust created by settlor
Whole income at MMR
Does not include business income
At rate of AOP if:-
- Beneficiaries have other income less than basic exemption limit (“BEL”) and are not beneficiaries in other trust or
- Trust created through will and it is the only trust created by settlor or
- Trust is non-testamentary trust created before 01.03.1970 for exclusive benefits of dependent relatives or
- Trust created on behalf of any funds for benefits of employee
Taxation of AOP (Sec 167B)
When shares of member are determinable
Income of member Tax
No member having more than BEL
Slab rates
Any member having more than BEL
MMR
Any member taxed at higher rate than MMR
On such portion relating to AOP – such higher rateOn balance - MMR
When shares of member are indeterminable
Tax on total income – tax @ MMRAny member charged at rate higher than MMR – tax @ such higher rate
Taxation of Grantor/Settlor
• No tax shall be assessable on the Grantor
• However where the trust is for the immediate or deferred benefit of the spouse and minor child – the individual shall be liable to tax to the extent of their share of income from the trust
Share of Income of the Beneficiary – Sec 67A
Where shares are determined under Sec 67A
• Share of each beneficiary shall be proportionately computed
• Income shall be part of the personal income under the respective heads of income
Taxation in the hands of Beneficiary (Sec 86)Chargeability of AOP Taxation of share of profit
MMR or higher rate Not included in total income – no tax
Slab rates Included in total income – rebate available on entire share –effectively no tax
Not taxed at all Included in total income – tax applicable
Foreign Trusts
Trust created outside India
Governed by laws of foreign countries
Settlor, Trustee or beneficiaries may or
may not be resident or citizen of foreign
country
Taxation of Foreign Trusts
Foreign Trusts
Revocable Trust
Irrevocable Trust
Income not accruing or arising in India
Income accruing or arising in India
No taxability
Indian Settlor
Taxable in the hands of settlor
Foreign Settlor
Taxability shall depend on status of beneficiaries
All beneficiaries -Indian resident
Trust shall be treated as AOP in India – world income taxable - foreign trustee shall be representative assessee
Trustee being in or controlling from India
Mix of Indian and non-resident beneficiaries
Indian beneficiaries taxed on distribution from trust
Caveats
• Relative for the purpose of taxation - spouse, brother, sister, any lineal ascendant or descendant
• No BEL available when taxability at MMR
• Prescribed special rates applicable for special incomes e.g. Sec 111A, Sec 112
• Indian resident beneficiaries required to report their interests in foreign trusts
Judicial Precedents
Character of discretionary trust cannot be changed by resolution passed by trustees –Commissioner of Income Tax vs. Ambalal Sarabhai D. Trust No. 5 [1998] 231 ITR 540 (Gujarat)
It is not open to the Assessing Officer to disregard the rectification of a trust deed, when it is done by order of a City Civil Court though such order would operate only prospectively – Commissioner of Income Tax vs. Kamla Town Trust [1996] 84 taxmann 248 (Supreme Court)
In case of trust where individuals are beneficiaries, the trust has to be treated as individual and hence deduction of TDS to be done accordingly – Commissioner of Income-tax-XVII vs. Food Corporation of India, Contributory Provident Fund Trust [2009] 177 taxmann 224 (Delhi)
Where a trust is created for the deferred benefit of a minor child by accumulating the income of the trust until such time the minor attains majority, clubbing provisions shall not be applicable -Commissioner of Income-tax vs. M R Doshi [1996] 85 taxmann 591 (Supreme Court)
Practical Issues
• Revocable Family Trust – issues regarding properties transferred being available for the creditors of the settlor
• Exemptions from capital gains tax under the Act – Not available for private trusts, etc.(interpretation issue)
• Sec 115BBDA of the Act – Double taxation on receipt as well as distribution
Few Questions
Whether settlor himself/herself can be trustee in trust?
Whether relatives of trustees can be beneficiaries to the trust?
Whether trustee’s personal assets can be utilised to make good the loss on account of breach of trust?
Whether settlor can vest property to trust which has on-going debt, with an availability clause (in Trust Deed) of utilisation only after the debt gets cleared?
In case of trusts other than irrevocable trusts, what will happen if in case the settlor is discharged as insolvent or bankrupt after creation of trust?
In case of death of beneficiaries, whether benefits available to beneficiaries shall directly be available to their legal heirs or successors?
Whether distribution of income by trust to the beneficiaries would get hit by Sec 56(2)(x) of the Act?
Thank YouDVS Advisors LLP
India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com
Research Credits – Kavitha Divakar & CA Jugal Gala
Copyrights © 2019 DVS Advisors LLP
Credits and AcknowledgmentsJugal Gala
DVS Research Team