A trust is a relationship among three parties where a trustee/group of trustees holds some assets on behalf of a beneficiary. This relationship is formed with the prime objective of escaping tax liabilities arising out of property transfer. In this article, we shall know about Trust, its formation, and the provisions applicable to its taxation.
Trust- Meaning and Composition
A trust is a triangular agreement wherein a trustee holds some property for the beneficiary’s benefit. These three parties are:
- Trustor: A trustor is a person to whom the property originally belongs and wishes to transfer this property for the benefit of the beneficiary
- Trustee: It is the person/party who holds the property transferred by the trustor. He has the property until the beneficiary receives it
- Beneficiary: It is the person/party on behalf of whom a trust comes into existence.
Formation of a Trust
Its formation relies solely based on belief/trust that the beneficiary has on his trustee. A trust may be either formed for commercial purposes or charitable purposes. The transferred property in a trust arrangement could be cash, shares, or any other asset.
Any person, such as an individual, HUF, company, etc. can form a trust. The process of trust formation is as follows:
- The trustor/founder forms a Trust Deed, which specifies the Trust’s objective and mode of execution so formed. With this, the Trust is registered under the governing law.
- Next, he submits an application attached to the deed to the registrar. It must be submitted only in the registrar office of the place where the said Trust is formed.
- The objectives for the formation of the Trust must be communicated to the registrar to get his permission.
How is a Trust taxed in India?
The tax liability of Trust is calculated in the same way as an individual below 60 years. Income below Rs.2,50,000 is exempted from tax.
Surcharge applicable is as below:
- 10% surcharge will be levied if the income is more than fifty lakhs but less than one
- 15% surcharge is applicable if the income crosses one crore.
(The provision of marginal relief will also be given wherever applicable)
- Further, health and educational cess @ 4% will also be charged.
It is mandatory for the type of trusts mentioned in subsections 4A, 4C, 4D, and 4E of section 139 of the IT Act, 1961, to file income tax returns. For others, it is optional.
Exemptions and deductions available to a Trust
Public Charitable Trusts can claim various exemptions and deductions under the IT Act:
- Under section 12AA
IT Act, 1961, gives the exemption of the donations received by the Trust while calculating its total taxable income. To avail of this exemption, certain conditions provided u/s 12A must be satisfied, and an application has to be submitted to Principal Commissioner in the prescribed form. S12A has been amended to S12AB in the Finance Act, 2020.
- Under section 80G
Under S80G, the number of donations by the Trust to certain charitable institutions can be availed as deductions. However, every donation does not fall under this section. Some donations can get you a 100% deduction, while others can get you a 50% deduction.
– Charitable Trusts can claim a 50% deduction.
– Private Trusts cannot claim any deduction under this section.
To claim these deductions, an application must be filled together with form 10 and must be submitted to the Income Tax Commissioner. If it is approved, you can claim the deduction.