Taxation of trusts

Subject to the fulfillment of specified conditions, a public trust is exempt from tax if the income is applied for charitable or religious purposes. Approved retirement trusts are also exempt from tax. In the case of private trusts, if the individual shares of the beneficiaries are ascertainable, they are included in the individual taxable incomes, the tax assessment being made either directly on the beneficiary or on the trustee as a representative of the beneficiary. However, if the trust has income from business, the entire income from the trust is taxed in the hands of the trustee at the maximum marginal rate applicable to individuals unless the trust is created by will for the benefit of relatives. When the individual shares of the beneficiaries are indeterminate (i.e., discretionary trust), the entire income is taxed din the hands of the trustees, in most cases at the maximum marginal rate applicable to individuals.

Taxation of beneficiaries

Where tax on a discretionary trust is assessed in the hands of the trustee, after-tax distributions to the beneficiaries are exempt from tax in their individual hands.

Tax treatment of settlor / grantor

If the trust effectively alienates income from the settlor/grantor, income tax liability thereon will be avoided. 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. The transfer of assets to the trustee maybe subject to gift tax. Stamp duty is payable on the transfer of immovable property.

Use of trusts

Trusts have been widely used as a planning tool to shift income to beneficiaries in lower tax brackets. Public charitable trusts are also common vehicles. Recent changes in tax laws have made trusts less attractive for commercial enterprises

Estates

An estate continues to be subject to tax as a separate entity at the rates applicable to individuals until the property is distributed among the heirs.