DEFINITION OF TRUST
As per section 3 of Indian Trust Act 1882 “A Trust is an obligation annexed to the ownership of the 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” Trivia : This definition has never been amended since its inception
WHY DO WE FORM A TRUST
Trust are generally, formed or created to fulfill any or more of the following Objectives:-
- For discharge of the charitable and/or religious sentiments of the author of settlor of the trust, in a way that ensures public benefit;
- For claiming exemption from Income tax U/s 10 or 11, as the case may be, in respect of incomes applied to charitable or religious purposes;
- For the welfare of the members of the family and/or other relatives, who are dependent on the settlor of the trust;
- For the proper management and preservation of a property;
- For regulating the affairs of a provident fund,superannuation fund or gratuity fund or any other fund constituted by a person for the welfare of its employees;
HOW TO CREATE A TRUST
Trusts are created when the settlor of the property transfers property or provides benefits for the welfare of beneficiaries or for the usage of public purposes. Four essential conditions are necessary to bring into being a valid trust.
- The person who creates a trust (settlor) should make an unequivocal declaration binding on him.
- He must transfer an identifiable property under irrevocable arrangement and totally divest himself of the ownership and the beneficial enjoyment of the income from the property .
- The objects of the trust must be defined and specified.
- The beneficiaries are specified.
WHO CAN CREATE A TRUST
As per Section 7 of the Indian Trusts Act, a trust may be created by every person competent to contract and by or on behalf a minor, with the permission of a principal court of original jurisdiction. Following are eligible to create a Trust.
- Trust by an Hindu Undivided Family;
- Trust by a Minor;
- Trust by a Woman;
- Association of Persons;
- Company(eg: Debenture-Redemption Fund Trust for redemption of its debentures);
WHAT IS A PRIVATE TRUST
A trust is called a Private Trust when it is constituted for the benefit of one or more individuals who are, or within a given time may be, definitely ascertained. Private Trusts are governed by the Indian Trusts Act 1882. A Private Trust may be created inter vivos or by will. If a trust in created by will it shall be subject to the provisions of Indian Succession Act, 1925.
The following are the requisites for creation of a Trust:
- The existence of the author/settlor of the Trust or someone at whose instance the Trust comes into existence and the settlor to make an unequivocal declaration which is binding on him.
- There must be a divesting of the ownership by the author of the trust in favour of the trustee for the beneficial enjoyment by the beneficiary.
- A Trust property.
- The objects of the trust must be precise and clearly specified.
- The beneficiary who may be particular person or persons.
Unless all the above requisites are fulfilled, a trust cannot be said to have come into existence.
WHAT IS PUBLIC TRUST
A trust is called as Public Trust when it is constituted wholly or mainly for the benefit of Public at large, in other words beneficiaries in the Public trust constitute a body which is incapable of ascertainment. The Public trusts are essentially charitable or religious trusts and are governed by the general Law. The provisions of Indian Trusts Act do not apply on Public Trusts. Like the private trusts, public trusts may be created inter vivos or by will. The Indian Trusts Act does not apply to public trusts which can be created by general law. There are three certainties required to create a charitable trust are as follows
- a declaration of trust which is binding on settlor,
- setting apart definite property and the settlor depriving himself of the ownership thereof, and
- a statement of the objects for which the property is thereafter to be held, i.e. the beneficiaries.
It is essential that the transferor of the property viz the settlor or the author of the trust must be competent to contract. Similarly, the trustees should also be persons who are competent to contract. It is also very essential that the trustees should signify their assent for acting as trustees to make the trust a valid one. When once a valid trust is created and the property is transferred to the trust, it cannot be revoked, If the trust deed contains any provision for revocation of the trust, provisions of sections 60 to 63 of the Income-tax Act will come into play and the income of the trust will be taxed in the hands of the settlor as his personal income. The difference between a public and private trust is essentially in its beneficiaries, A private trust’s beneficiaries are a closed group, while a public trust is for the benefit of a larger cross-section having a public purpose.However, there may be trusts which are a blend of both and are known as Public-cum-Private Trusts.
WHAT ARE PUBLIC-CUM-PRIVATE TRUSTS :
There may be certain trusts whose part of the income may be applied for public purposes and a part may go to a private person or persons, Such trusts are known as Public cum Private Trusts. Such trusts, in respect of the portion of the income going to private person or persons are assessable as private trusts and in respect of that portion of the income which is applied for public purposes, they shall be eligible for exemption under section 11 provided these trust are created before the commencement of Income-tax Act, 1961 i.e. before 1-4-1962. Public-cum-private created on or after 1-4-1963 shall not be eligible for exemption u/s 11.
DO WE HAVE TO REGISTER THE TRUST?
As per section 5 of the Indian Trusts Act, a private Trust in relation to an immovable property must be created by a non-testamentary instrument in writing, signed by the author of the trust or the trustee and registered(under Section 17 of Indian Registration Act) . Thus,registration of a trust is necessary when it is declared by a non-testamentary instrument. This registration would still be required, even if the instrument declaring the trust is exempt from registration under the Indian Registration Act. In case of a Private Trust declared by a will,registration will not be necessary, even if it involves an immovable property. Registration will not be required, of a trust in relation to movable property. In case of Public Trust, whether in relation to movable property or an immovable property and whether created under a will or inter vivos, registration is optional but desirable. There are two conditions for registration of a trust namely :
- An application to be made for registration in the prescribed form (Form 10A) and in the prescribed manner to the Commissioner of Income tax either before 1st July 1973 or within one year from the date on which the trust is created whichever is later
- Where the total income of the trust or institution without giving effect to the provisions of section 11 & 12 exceeds 50,000/- in any previous year, the accounts of the trust or institution for that year has to be audited by a chartered accountant or any other accountant entitled to be appointed as an auditor of companies. The report of audit should be in Form No. 10B prescribed in the Income-tax Rules, 1962 and said audit report has to be furnished along with the return of income.
In case of Charitable or religious Trust in relation to an immovable property, for claiming exemption u/s. 11 of the I.T. Act 1961 it is essential that the instrument of trust is duly registered. Registration is always desirable even if it is not statutorily required. Following are the advantages of a Registered trust:
- It becomes an official document with support and law;
- Effectuates Transmutation of possession;
- Easy conveyance of trust-property to the Trustee;
Advantages of a Trust
- A trust can be formed for Charitable/Religious purposes which enables the settlor to discharge his sentiments for public benevolence,amelioration of human suffering,advancement of knowledge etc., in a regulated and proper way.
- From taxation point of view, a charitable or religious trust enjoys several tax exemptions and benefits
- Donations to eligible charitable institutions are also deductible from taxable income of the donor. All the Industrial Big wigs have formed its own charitable trust, to channelize their donations for public benevolence through that trust, which remains under their own control. This enables them to apply the donations in a regulated manner according to their own discretion and still avail of the tax exemptions, both in respect of the donations made and also the income of the trust.
- A trust can also be formed for the welfare of family members and relatives dependent upon the settlor. Besides,there is an ample scope of tax planning through private /family trusts.
- The Institution of a trust enables the settlor to preserve his property from division and transfer to outsiders.
TAXATION Private trusts
When shares of individual beneficiaries are determinate:
- The shares of all beneficiaries are liable to be assessed, either by the trustee(s) as a representative assessee or sometimes directly in the hands of the beneficiary entitled to income. The assessment is made at the rate that is applicable to total income of each beneficiary.
- If the income of the trust consists of profits and gains of business, income tax is charged in the hands of trustee(s) on the whole of the income & at maximum marginal rate. This provision is not applicable, incase of a trust which has been declared by anyone exclusively for the benefit of a relative dependent on him and if this trust is the only trust so declared by him.
When individual shares of beneficiaries are indeterminate [U/s164]:
- As a representative assesses, the Trustee(s) is/are liable to tax.
- If the income consists of profits and gains of business, then the entire income of the trust is charged at maximum marginal rate of tax, except in cases of the a trust that has been declared by a person exclusively for the benefit of a relative dependent on him and if this trust is the only trust so declared by him.
However, the maximum marginal rate of tax is not applicable in the following cases, and the income will be chargeable to tax as if it were income of an association of persons(AOP) :-
- Where none of the beneficiaries has any other income chargeable to tax under the Income Tax Act and none of the beneficiaries is a beneficiary under any other trust or
- Where the relevant income or part of relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him or
- Where the trust is a non-testamentary trust created before March 1, 1970 for the exclusive benefit of relatives of the settlor mainly dependent on him for their supporter maintenance or, where settlor is a Hindu undivided family, for the exclusive benefit of its members so dependent upon it or
- Where the trust is created on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession.
In cases of (a), (b) and (c) the relevant income is taxable in the hands of trustees as if it were the total income of an association of persons, while income falling under (d) supra is exempt from tax.
Section 11 to 13 of the Income-tax Act, 1961 deals with taxation of Charitable Trust/Institution, in addition to following as follows
- Section 11 provides the manner in which income is exempt from income-tax.
- Section 12 provides the income of trust or institutions from contributions.
- Section 12A provides the conditions as to registration of trusts, etc.
- Section 12AA provides the procedure for registration.
- Section 13 provides section 11 not to apply in certain cases.
This is applicable in following circumstances:
- When the trust is created after March 31, 1962, then any part of income of the trust ensures, directly or indirectly, for the benefit of specific categories of persons like, the author of the trust, trustee or the manager of the trust, substantial contributor to the trust and also any relative of such author, trustee, etc.
- Any part of the income/property of the trust is used during the relevant year, directly or indirectly, for the benefit of given categories of persons.
- If the trust funds are invested in contravention of investment pattern of such funds.
Other Conditions of taxability of income of charitable & religious trusts are as follows
- Filing of return of the income [U/s 139(4A)] by trustees of a charitable or religious trusts if total income of the trust exceeds the minimum amount that is chargeable to income-tax without giving an effect to provisions of Section 11 and 12.
- Liability of the trustees as 'representative assessees' [U/s 161] wherein they are liable to tax for their representative capacity in respect of the income of trust.
U/s 80(G), deductions (or special exemptions) in respect of donations to certain funds, or charitable institutions, etc is granted. For being eligible under this section, the charitable trusts or institutions require to obtain a valid certificate by given an application to them in Form 10G The basic condition for claiming exemption of income by the trust/institution is that “Income should be derived from the property held under a trust and the said income should be applied to charitable or religious purpose in India”.
WHAT ARE THE PRIVILEGES TO THE DONORS U/S 80G
As we already know that an NGO can avail income tax exemption by getting itself registered and complying with certain other formalities, but such registration does not provide any benefit to the persons making donations. The Income Tax Act has certain provisions which offer tax benefits to the "donors". All NGO's should avail the advantage of these provisions to attract potential donors. Section 80G is one of such sections.
Registration Under Section 80G
If an NGO gets itself registered under section 80G then the person or the organisation making a donation to the NGO will get a deduction of 50% from his/its taxable income. The NGO has to apply in Form No. 10G As per Annexure-29 to the Commissioner of Income Tax for such registration. Normally this approval is granted for 2-3 years.
Note: The Finance Act, 2009, has deleted the five year restriction under proviso to sub section (5) clause (vi). In other words, registration certificates issued after 1st October, 2009 can be considered as one time registration unless any specific restriction is provided in the certification itself.Documents to be filled with form 10G
The application form should be sent in triplicate to the Commissioner of Income Tax alongwith the following documents :
- copy of income tax registration certificate.
- detail of activities since its inception or last three years whichever is less
- copies of audited accounts of the institution/NGO since its inception or last 3 years whichever is less.
Conditions to be fulfilled under Section 80G
For approval under section 80G the following conditions are to be fulfilled :
- The NGO should not have any income which are not exempted, such as business income. If, the NGO has business income then it should maintain separate books of accounts and should not divert donations received for the purpose of such business.
- The byelaws or objectives of the NGOs should not contain any provision for spending the income or assets of the NGO for purposes other than charitable.
- The NGO is not working for the benefit of particular religious community or caste.
- The NGO maintains regular accounts of its receipts & expenditures.
- The NGO is properly registered under the Societies Registration Act 1860 or under any law corresponding to that act or is registered under section 25 of the Companies Act 1956.
EXTENT OF BENEFIT
There is ceiling limit upto which the benefit is allowable to the donor. If the amount of deduction to a charitable organisation or trust is more than 10% of the Gross Total Income computed under the Act (as reduced by income on which income-tax is not payable under any provision of this Act and by any amount in respect of which the assessee is entitled to a deduction under any other provision of this Chapter), then the amount in excess of 10% of Gross Total Income shall not qualify for deduction under section 80G. In other words, while computing the total income of an assessee and for arriving at the deductible amount under section 80G, first the aggregate of the sums donated has to be found out. Then 50 per cent of such donations has to be found out and it should be limited to 10 per cent of the gross total income. If such amount is more than 10 per cent of the gross total income, the excess will has to be ignored.
Cash payment upto Rs.10000/-
The other important change made by the Finance Act, 2012 is that any donation under section 80G has to be made otherwise than in cash, if the amount exceeds Rs. 10,000/-. In other words, donation in excess of Rs. 10,000/- under section 80G should be made through account payee bank transfers.
IILUSTRATION OF BENEFITS UNDER SECTION 80G
The persons or organisation who donate under section 80G gets a deduction of 50% from their taxable income. Here at times a confusion creeps in, that the tax advantage under section 80G is 50%, but actually it is not so. 50% of the donation made is allowed to be deducted from the taxable income and consequently tax is calculated. The ultimate benefit will depend on the tax rates applicable to the assessee. Let us take an illustration. Mr. X an individual and M/s. Y Pvt. Ltd., a Company both give donation of Rs. 1,00,000/- to a NGO called ABC Sanga Seva. The total income for the year 2003-2004 of both Mr. X and Ms. Y Pvt. Ltd. is Rs. 2,00,000/-. Now assuming that the rates are 30% for the individuals and 40% for the Companies without any minimum exemption limit. The tax benefit would be as shown in the table :
|i) Total Income for the year 2003-2004||2,00,000.00||2,00,000.00|
|ii) Tax payable before Donation||60,000.00||80,000.00|
|iii) Donation made to charitable organisations||1,00,000.00||1,00,000.00|
|iv) Qualifying amount for deduction (50% of donation made)||50,000.00||50,000.00|
|v) Amount of deduction u/s 80G (Gross Qualifying Amount subject to a maximum limit 10% of the Gross Total Income)||20,000.00||20,000.00|
|iv) Taxable Income after deduction||1,80,000.00||1,80,000.00|
|v) Tax payable after Donation||54,000.00||72,000.00|
|vi) Tax Benefit U/S 80G (ii)-(v)||6,000.00||8,000.00|
Note : The tax rates and mode of computation is not actual
DO'S & DON'TS
- The Objectives of the trust should fall within the definition of a charitable activity;
- Tax Registration Certificate from the income-tax commissioner should be obtained;
- The Income of the trust should be applied only for the objectives of the trust;
- In case the trust is not able to apply the income as specified, accumulate the balance or invest such balance only in specified securities in accordance with Income-Tax Act;
- Maintain Books of accounts and get it audited from a chartered accountant;
- File income-tax return of the trust regularly within the specified time limit;
- Anonymous donation in excess of Rs 1 lakh or 5% of total receipts, whichever is higher, should not be accepted;
- Contributions from any foreign source should be accepted only after the government approves them and if they are in compliance with the provisions of the Foreign Contribution Regulation Act;
- The trust should not undertake commercial activity. In case any commercial activity is undertaken in furtherance of the trust's charitable purpose, separate books of accounts should be maintained for it;
However, under the proposed Direct Tax Code charitable trust would be called a NGO and it is proposed to tax income of non-profit organizations at 15% on the surplus income.
- Trusts today play a significant role in most financial and legal systems and are recognized under the Hague Convention. In a move to revitalize archaic laws, the government in a market boosting initiative recently announced a proposal to amend the Indian Trust Act, 1882 (“Act”) to permit all trusts to invest in shares and bonds of listed companies.
- The government has exempted non-residents and private discretionary trusts from mandatory filing of income tax returns electronically. Accordingly, it has been decided that it will not be mandatory for agents of non-residents if his or its total income exceeds Rs 10 lakh to electronically furnish the return of income of non-residents for assessment year 2012-13. The existing e-filing software does not accept the return of a private discretionary trust in the status of an 'individual', it said, adding, e-filing of tax return in such case is not compulsory.