COURTKUTCHEHRY SPECIAL REPORT
Taxation of Trusts in India: Section 13 Violations, Private Trust Planning, and Global Implications
Public Charitable Trusts Face Strict Scrutiny Under Section 13
Private Trusts Offer Tax Planning, Asset Protection, and Succession Solutions
By Our Legal Reporter
New Delhi: December 12, 2025:
Trusts are a vital part of India’s legal and financial landscape. Public charitable and religious trusts provide social welfare, while private trusts help families manage wealth, succession, and tax planning. The Income-tax Act, 1961 lays down detailed rules for their taxation. Recent amendments and judicial interpretations have highlighted the importance of compliance, particularly under Section 13, which prevents misuse of charitable funds.
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Section 13 Violations: Consequences for Public Trusts
Public trusts enjoy exemptions under Sections 11 and 12, but these are withdrawn if income or property benefits specified persons such as trustees, founders, or relatives. Key implications include:
- Exemption withdrawal: The affected portion of income becomes taxable at MMR.
- Compliance risk: Even inadvertent violations, such as lending without security or paying excessive remuneration, attract Section 13(2).
- Registration impact: While Section 13 does not automatically cancel 12AB registration, repeated violations may trigger cancellation proceedings.
- Judicial stance: Courts emphasise strict adherence to prevent diversion of charitable funds to private hands.
Revocable vs Irrevocable Private Trusts
- Revocable Trusts (Sections 61–63): Income is taxed in the hands of the settlor, as control is not genuinely parted. These trusts provide no tax benefit.
- Irrevocable Trusts: Taxed under Sections 161 and 164, depending on whether beneficiaries’ shares are determinate. They offer genuine tax planning opportunities and asset protection.
Specific Trusts: Family Tax Optimisation
Also Read: Taxation of Public and Private Trusts in India: Key Rules, Exemptions, and Compliance Challenges
Private specific trusts, where beneficiaries and shares are determinate, allow income splitting across family members. Advantages include:
- Taxation at slab rates of individual beneficiaries.
- Redistribution of wealth to non-earning members, seniors, or minors.
- Avoidance of clubbing provisions if structured carefully.
This makes specific trusts a legitimate tool for reducing overall family tax burden.
Discretionary Trusts: Asset Protection for HNIs and NRIs
Discretionary trusts, taxed at MMR, are not primarily tax-saving tools but serve critical roles in:
- Asset protection: Shielding wealth from creditors, disputes, and litigation.
- Succession planning: Ensuring smooth inter-generational transfer.
- Global tax efficiency: Avoiding estate duty in foreign jurisdictions and timing distributions for tax advantages.
Trusts and Capital Gains Planning
Trusts can strategically reduce capital gains tax:
- Public trusts: Section 11(1A) allows reinvestment of sale proceeds into new capital assets for exemption.
- Private trusts: Gains can be allocated to beneficiaries in lower tax brackets.
- Special provisions: Section 112A concessional rates on listed securities flow through to beneficiaries.
Cross-Border Estate Planning
Indian families with global assets face inheritance taxes abroad. Irrevocable private trusts help avoid estate duty by transferring ownership before death. Benefits include:
- Avoiding probate litigation.
- Ensuring continuity of wealth transfer.
- Complying with FEMA rules while distributing income to NRIs/OCIs.
Education and Maintenance Trusts for Minors
Irrevocable trusts for minor children provide tax advantages:
- Income not clubbed with parents under Section 64(1)(v).
- Capital gains taxed in trust’s hands, not parents.
- Funds secured for education, marriage, or medical needs.
Such trusts combine financial discipline with tax efficiency.
Public Charitable Trusts in Education and Healthcare
Trusts running schools, hospitals, or universities enjoy exemptions under Sections 10(23C) and 11. Tax efficiency strategies include:
- Treating capital expenditure as application of income.
- Segregating corpus and non-corpus funds.
- Using Section 11(2) accumulation for expansion.
- Maintaining incidental business activities under Section 11(4A).
Succession Planning for Family Businesses
Family business trusts consolidate ownership and prevent disputes among heirs. Benefits include:
- Avoiding probate delays and public disclosure.
- Collective voting rights for stability.
- Tax optimisation through specific trust structures, with dividends taxed individually at slab rates.
Visual comparison chart that highlights the taxation differences between Public Trusts and Private Trusts in India.
Taxation Rules: Public vs Private Trusts in India
|
Aspect |
Public Charitable/Religious Trusts |
Private Trusts (Specific & Discretionary) |
|
Exemption Basis |
Sections 11 & 12 – income applied to charitable/religious purposes |
No blanket exemption; taxed under Sections 161 & 164 |
|
Registration Requirement |
Must be registered under Section 12AB |
Not mandatory, but trust deed governs taxation |
|
Income Application |
At least 85% of income must be applied; up to 15% can be accumulated |
Income taxed in trustee’s hands as representative assessee |
|
Accumulation Beyond 15% |
Allowed under Section 11(2) with Form 10, specific purpose, max 5 years |
Not applicable |
|
Business Income |
Exempt if incidental to charitable objects & separate books maintained (Sec 11(4A)) |
Taxed at MMR under Sec 161(1A), except limited exceptions |
|
Anonymous Donations |
Taxable @30% under Sec 115BBC (except wholly religious trusts) |
Not applicable |
|
Corpus Donations |
Exempt under Sec 11(1)(d) if with written direction & invested in Sec 11(5) modes |
Treated as trust income unless deed specifies otherwise |
|
Capital Gains |
Exempt under Sec 11(1A) if reinvested in new charitable assets |
Gains taxed in trustee’s hands; flow-through to beneficiaries |
|
Violation of Rules |
Section 13: misuse of funds for specified persons → exemption withdrawn, taxed at MMR |
Revocable trusts taxed in settlor’s hands; discretionary trusts taxed at MMR |
|
Beneficiary Taxation |
Not applicable (public benefit) |
Specific trust: taxed at slab rates of beneficiaries; Discretionary trust: taxed at MMR |
|
Succession/Estate Planning |
Used for hospitals, schools, universities, social welfare |
Used for family wealth, succession, asset protection, cross-border estate planning |
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Key Takeaways
- Public Trusts: Enjoy exemptions but must strictly comply with Sections 11, 12, and 13. Violations lead to taxation at MMR.
- Private Trusts: Offer flexibility in family tax planning and asset protection. Specific trusts allow income splitting, while discretionary trusts provide succession and estate planning benefits despite higher tax rates.
Conclusion
Trusts in India serve multiple roles—from charitable welfare to family wealth management. Public trusts must strictly comply with Section 13 to retain exemptions, while private trusts offer tax optimisation, asset protection, and succession planning. With globalisation, trusts also help Indian families manage estate duty abroad. Proper structuring and compliance ensure that trusts remain powerful instruments for both social good and financial planning.
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