Private trusts are increasingly used for succession planning, asset protection, and providing for family members and family businesses. Their taxation is governed by a special regime under the Income-tax Act, 1961. To help members discharge their professional responsibilities effectively, the Direct Taxes Committee of the Institute of Chartered Accountants of India (ICAI) published the “Handbook on Taxation of Private Trusts under Income-tax Act, 1961” in February 2023.
Taxation of Private Trusts: Key Principles
A private trust is created by a Settlor for the benefit of specific individuals (usually relatives or persons with whom the Settlor has a close social or economic relationship).
Under the Income-tax Act, 1961, a private trust is not a separate taxable entity like a company or AOP. Instead, the trustee is assessed as a “representative assessee” (Sections 160 & 161). The core provisions governing taxation of private trusts are Sections 161 to 164.
Scope of Sections 161, 162, 163 and 164:
- Section 161 – Trustee is liable in the like manner and to the same extent as the beneficiaries. Tax is generally charged as if the income is received directly by the beneficiaries (beneficiary-level taxation in determinate/specific trusts).
- Section 162 – Right of the trustee to recover the tax paid from the beneficiaries or from trust property.
- Section 163 – Defines who can be treated as an “agent” (mainly for non-residents; peripheral to domestic private trusts).
- Section 164 – Applies to discretionary/indeterminate trusts (where individual shares are unknown). Income is taxed at the maximum marginal rate (currently 42.744% with surcharge & cess), except in specified cases (e.g., trusts created solely by will for dependent relatives or where no beneficiary has other taxable income above basic exemption).
All regular heads of income, i.e. house property, profits & gains of business or profession, capital gains, and income from other sources, are computed in the hands of the trustee. Agricultural income remains exempt under Section 10(1).
Classification of Private Trusts
Private trusts are distinguished from public charitable/religious trusts. Private trusts benefit specific, identifiable individuals, whereas public trusts benefit the public or an uncertain class.
Common types of private trusts include:
- Specific / determinate trusts
- Discretionary / indeterminate trusts
- Family trusts
- Business / asset-holding trusts for succession planning
Formation of Private Trusts
Section 3 of the Indian Trusts Act, 1882 defines a trust as:
“an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.”
In simple terms, the Settlor legally transfers property to the trustee(s), who manage and apply it for the beneficiaries as per the trust deed.
Today, private trusts are widely used not only for immovable property but also for corporate restructuring, fund management, tax-efficient wealth transfer, and seamless intergenerational succession.
Contents & Utility of the ICAI Handbook (February 2023)
The handbook is a comprehensive, practitioner-focused resource covering:
- Formation and registration of private trusts
- Determinate vs discretionary trusts and their tax consequences
- Detailed commentary on Sections 160–164
- Computation of total income and applicable tax rates
- Filing of ITR-5 / ITR-7 for trusts, TDS, and advance tax
- Compliance, documentation, and tax audit requirements
- Numerous practical examples, case studies, and judicial precedents
It is regularly updated for changes and remains the most authoritative and user-friendly guide on the subject.
Conclusion
The ICAI Handbook on Taxation of Private Trusts under Income-tax Act, 1961 (February 2023) is an indispensable resource for chartered accountants, tax consultants, lawyers, students, and HNIs/family offices. It demystifies the complex interplay between the Indian Trusts Act, 1882 and the Income-tax Act, 1961, enabling professionals to structure and comply with private trusts in a tax-efficient and legally robust manner.
ICAI’s Handbook on Taxation of Private Trust of Income-tax Act, 1961 (February 2023)