COURTKUTCHEHRY SPECIAL REPORT
Taxation of Public and Private Trusts in India: Rules, Exemptions, and Compliance
Public Charitable Trusts Must Meet Strict Conditions for Tax Exemption
Private Trusts Face Different Tax Rules Based on Beneficiaries’ Rights
By Our Legal Reporter
New Delhi: December 12, 2025:
Trusts play a vital role in India’s social and economic framework. Public charitable and religious trusts support education, healthcare, poverty relief, and cultural preservation, while private trusts help families manage wealth and succession. The Income-tax Act, 1961 lays down detailed rules for their taxation, exemptions, and compliance. Recent amendments and judicial rulings have further clarified how trusts must operate to retain tax benefits.
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Public Charitable and Religious Trusts
Basic Conditions for Exemption
Public trusts can claim exemption under Sections 11 and 12 if:
- They are established for charitable purposes under Section 2(15).
- They are registered under Section 12A/12AB.
- At least 85% of income is applied to charitable purposes in India.
- Proper books of accounts are maintained and audited.
- No income or property benefits specified persons under Section 13(1)(c).
Failure to meet these conditions can result in denial of exemption.
Application of Income
If a trust cannot apply 85% of income in a year, it may:
- Carry forward the application to the next year using Form 9A.
- Accumulate income for up to five years under Section 11(2) with Form 10.
Unspent income beyond these limits is taxed at the maximum marginal rate (MMR).
Business Income of Trusts
Under Sections 11(4) and 11(4A), business income is exempt only if incidental to charitable objectives and separate accounts are maintained. For example, a hospital trust selling medicines is exempt, but a purely commercial venture is taxable. Courts apply the “predominant object” test to distinguish genuine charitable activity from profit-making.
Donations and Capital Gains
Anonymous Donations
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- Taxed at 30% plus surcharge and cess under Section 115BBC if records of donors are not maintained.
- Religious trusts are exempt for donations during ceremonies, but mixed trusts face partial exposure.
- Maintaining donor details (name, address, PAN) is essential for compliance.
Corpus Donations
- Exempt under Section 11(1)(d) if accompanied by a written direction.
- Must be invested in permitted modes under Section 11(5).
- From AY 2022-23, corpus funds cannot be spent directly unless replenished later.
Capital Gains
- Exempt under Section 11(1A) if sale proceeds are reinvested in new capital assets for charitable purposes.
- Proportionate exemption applies if only part of the proceeds is reinvested.
- Diversion of funds for non-charitable purposes makes gains fully taxable.
Private Trusts
Specific Trusts (Determinate Beneficiaries)
- Taxed under Section 161(1) as a representative assessee.
- Trustee is taxed in the same manner as beneficiaries.
- Income retains its character (business, capital gains, etc.).
- Beneficiaries are taxed at normal slab rates.
Discretionary Trusts (Indeterminate Beneficiaries)
- Taxed under Section 164(1) at the Maximum Marginal Rate (MMR).
- Exceptions apply for trusts created exclusively for minors or by will for dependent relatives.
- Courts uphold MMR to prevent misuse of discretionary powers.
Section 13: Safeguards Against Misuse
Section 13 prevents misuse of trust funds by prohibiting benefits to related persons such as trustees, founders, or major donors. Violations—such as lending without security or excessive remuneration—result in withdrawal of exemption and taxation at MMR. Even unintentional violations attract consequences, reinforcing transparency and accountability.
Recent Amendments and Compliance Trends
- The Finance Act 2024 mandated stricter registration requirements under Section 12AB for trusts seeking exemption.
- New compliance rules require timely filing of returns, audit reports, and disclosure of donor details.
- Regulatory tightening ensures that trusts remain focused on charitable purposes and avoid misuse of funds.
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Conclusion
The taxation of trusts in India reflects a balance between encouraging charitable activity and preventing misuse. Public trusts enjoy exemptions but must comply with strict rules, while private trusts face taxation based on the certainty of beneficiaries’ shares. Anonymous donations, corpus funds, and capital gains are subject to specific provisions, and violations can lead to heavy tax liabilities.
For trustees and beneficiaries, understanding these rules is essential to ensure compliance, preserve exemptions, and maintain public confidence in the trust system.
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