COURTKUTCHEHRY SPECIAL REPORT
FAQ: How Trusts Help HNIs and Charitable Institutions Optimise Tax in India
Private Trusts Offer Tax Planning, Asset Protection, and Succession Solutions
Public Charitable Trusts Gain Efficiency Through Strategic Application and Compliance
Our Legal Reporter
New Delhi: December 12, 2025:
Q1. How can HNIs use trusts to optimise tax on investment income?
HNIs often face high marginal tax rates. By transferring investment portfolios into a Specific Trust, income can be allocated to beneficiaries with lower tax liability. Dividends, interest, and mutual fund earnings can be split across family members to keep each within lower slabs. Long-term capital gains on equity (Section 112A) and debt funds (Section 112) retain concessional rates in beneficiaries’ hands. Trusts also allow portfolio segregation—for example, safe instruments for minors and higher-yield assets for adults.
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Q2. Can trusts ring-fence risky assets and isolate tax exposure?
Yes. Trusts are used to ring-fence high-risk assets such as start-up equity, crypto, or speculative real estate. By transferring these into a separate irrevocable trust, any future tax liabilities or disputes remain confined to the trust. Losses can be carried forward, while gains are distributed tax-efficiently. This protects the family’s core wealth and reduces exposure to volatile sectors.
Q3. How does a Will-based Testamentary Trust help in succession planning?
A Testamentary Trust created under a Will becomes operational only upon death. It avoids lifetime taxation, gift tax, and clubbing provisions. Income is divided among beneficiaries individually, reducing consolidated tax liability. It also prevents probate disputes and protects vulnerable heirs such as minors or disabled dependents.
Q4. How can a Public Charitable Trust optimise tax liability under the 85% rule?
Public trusts must apply at least 85% of income to charitable purposes annually. Strategic planning includes:
- Counting capital expenditure (e.g., buildings, equipment) as application.
- Scheduling major payments within the same financial year.
- Using Form 9A for deemed application or Form 10 for accumulation.
This ensures compliance and avoids taxation at MMR.
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Q5. What strategies help in accumulation under Section 11(2)?
Trusts may accumulate income beyond 15% for up to five years if:
- They file Form 10 specifying precise purposes (e.g., hospital expansion).
- Funds are invested in approved modes under Section 11(5).
- Accumulation is staggered to avoid large surpluses.
This supports long-term projects while maintaining exemption.
Q6. How can Public Trusts structure business activities under Section 11(4A)?
Business income is exempt if incidental to charitable objectives and separate books are maintained. Examples include:
- Hospitals selling medicines.
- Educational trusts running hostels.
Revenue must be used for charitable purposes, with fair pricing and transparent records. Courts have upheld that incidental activities do not negate charitable status when the dominant purpose remains altruistic.
Q7. How should Public Trusts manage foreign contributions?
Foreign contributions under FCRA registration are treated as voluntary contributions under Section 12. Efficient planning requires:
- Separate bank accounts and books for FCRA funds.
- Aligning inflows with project expenditures to meet the 85% rule.
- Ensuring corpus donations carry written directions.
Non-compliance risks penalties, cancellation of FCRA registration, or withdrawal of 12AB exemption.
Q8. How does capital expenditure planning minimise tax burden?
Capital expenditure for charitable purposes qualifies as application of income. Trusts can schedule construction, land purchase, or equipment acquisition during years of high receipts to meet the 85% threshold. Phasing projects over several years ensures consistent exemption and long-term development.
Q9. How can Public Trusts maximise tax benefits from voluntary contributions?
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Voluntary contributions are exempt if structured properly:
- Corpus donations with written directions under Section 11(1)(d) are not subject to the 85% rule.
- Non-corpus donations must be applied strategically to avoid surplus.
- Donor records must be maintained to avoid anonymous donation tax under Section 115BBC.
Clear documentation enhances both tax benefits and donor confidence.
Conclusion
Trusts remain powerful instruments for HNIs seeking tax optimisation and public institutions pursuing charitable expansion. Specific trusts reduce family tax burdens, discretionary trusts protect assets, and testamentary trusts ensure smooth succession. Public trusts achieve efficiency through disciplined application of income, accumulation strategies, and compliance with Section 11, Section 13, and FCRA rules. Proper structuring ensures both tax efficiency and long-term sustainability.
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