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Guide to Taxability of Trust in India

Most of us are familiar with the word income tax return and if not, familiar you must have heard the word income tax once in your life.

But do you know about the taxability of trust in India?

This content piece aims to make you familiar with the taxability of trust in India. Also, you will learn how trust in India becomes eligible to comply with the Income Tax Act of 1961’s taxation laws.

Trust in India

Trust in India is defined as “a duty connected to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and acknowledged by him, for the benefit of another or of another and the owner,” according to section 3 of the Indian Trust Act, 1882.

Simply put, it is the transfer of property from one person (settler) to another (trustee) who manages it for the benefit of another (beneficiary). The assets must be lawfully transferred from the settlor to the trustee of the trust.

Parties to Formation

Settler – The person or entity who establishes trust. Also called a Trustee or a Grantor

Trustee – An owner who has agreed to utilize his property for the benefit of another

Beneficiary – The owner of the Trust property who benefits from it

Who is Eligible to form a Trust?

Any competent individual, that is, someone above the age of 18 who is mentally sound, can establish a trust for any legal reason (s). However, the age of majority is twenty-one years in the case of a juvenile who has been designated a guardian by the court or whose property has been taken over by the court of wards.

With the consent of a primary civil court of original jurisdiction, a trust can be established by or on behalf of a minor. A company, firm, society, or group of people, in addition to a human being, is capable of establishing trust.

Types of Trust in India

In India, a trust can be established in one of two ways: as a Public Trust or as a Private Trust.

Private Trust: A private trust is one that is established with the primary objective of safeguarding the interests of a small number of beneficiaries or a specified group of beneficiaries.

Public Trust: A public trust is one that was established for the benefit of a big group or the entire public. It is often founded for scientific, religious, educational, or charitable goals, and it captures the interest and benefit of public groups. Check out auditor and tax consultants here.

Filing of Income Tax Returns by a Trust

Under the Income Tax laws, a trust is not officially defined as a taxable entity; rather, the term representative assessee has been used to describe the trust’s taxability.

The following tax provisions can be used to determine a trust’s taxability:

Section 10 4D (E): The Trust Act of 1882 defines trust as an organization or institution that is registered under Section 10 4D (E).

Section 139 4A: This section specifies the taxability of every person who receives income before allowance or exemption under Section 11 and Section 12 from property held with any trust or other legal obligation wholly for charitable purposes, and who receives voluntary contributions on behalf of such trust or institution.

Section 139 4C: This section requires any board, body, authority, or trust to file an income tax return if the total income for which it is responsible exceeds the maximum exemption level. You can hire tax consultants for filing tax returns and other accounting activities.

Section 139 4D: This section provides that every university, college, or institution registered as a trust for receipt of any revenue as taxable as per law in the previous year must file an income tax return.

Section 139 4E: If a trust’s income exceeds the basic exemption limit, the section requires it to file a Return of Income for any income or loss received in the preceding year in accordance with the act’s provisions.

Section 44AB: Any trust or institution with income in excess of the basic exemption limit that is required by law to file an income tax return must also have its accounts audited under section 44AB.

Tax Exemption and Compulsory Filing of Income Tax Return by Trust

Any trust with gross total revenue over the act’s basic exemption limit is required to file an income tax return with the tax department.

Associations, Institutions, Investor Protection Funds, Research Associations, News Companies, Core Settlement Guarantee Funds, Commission Authority, Business Trust Debt Funds, Trade Unions, Mutual Funds, Venture Capitalists, and Special Board Trusts must all file an income tax return, even if their income is below the exemption limit.

While a trust that is registered as a charity or religious trust can take advantage of the following income tax exemptions:

Section 10 – Exemption on educational institute revenue, any voluntary contribution made to any electoral trust, hospital income, and income of other trusts if they meet the provisions of Section 10 (23C) iiiab/ iiiad /vi.

Section 11 – Income from property held in a trust established purely for religious or charitable purposes is exempt.

Section 12 – Income from voluntary contributions made to the trust, or institution for only charitable or religious purposes is exempt from taxation.

If the return is filed before the 31st December of the assessment year, a penalty of Rs 5,000/- as per Section 234 F must be paid; otherwise, the penalty would be Rs 10,000 for the late filing of an income tax return by the trust.

In other circumstances, if the belated return is filed with a total income of less than Rs. 500,000/-, a fine of not more than Rs. 1,000/- will be levied.

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