Taxation of Private Family Trusts in India
Trust taxation turns on one structural question — are beneficiaries and their shares determinate or indeterminate — and the governing provisions were renumbered on 1 April 2026 with the replacement of the Income-tax Act, 1961 by the Income-tax Act, 2025. This guide sets out the current position, verified directly against the Bare Act text.
The Income-tax Act, 1961 was repealed and replaced by the Income-tax Act, 2025, in force from 1 April 2026. The trust-taxation provisions have been renumbered — verified word-for-word against the Bare Act text, not inferred from commentary. A trustee is assessed as a representative assessee under Section 303, with liability governed by Section 304. Where beneficiaries and their shares are determinate, the trustee is taxed exactly as the beneficiary would have been. Where they are indeterminate — the position in most discretionary trusts — Section 307 charges the income at the maximum marginal rate, subject to specific, narrowly drawn exceptions.
Separately, payments by a trust to a non-resident beneficiary or foreign payee now follow a materially changed reporting regime: Form No. 145 and Form No. 146 (replacing the former Forms 15CA and 15CB) under Rule 220 of the Income-tax Rules, 2026, filed under Section 397(3)(d) of the 2025 Act.
Sections 303, 304 and 307 — Verified Against the Bare Act
| Subject | Income-tax Act, 2025 In force from 1 April 2026 | Income-tax Act, 1961 Periods before 1 April 2026 |
|---|---|---|
| Representative assessee — including a trustee under a duly executed instrument (Section 303(1)(d)) or oral trust (303(1)(e)) | Section 303 | Section 160 |
| Liability of representative assessee — determinate trusts, same duties and rate as the beneficiary | Section 304 | Section 161 |
| Charge at maximum marginal rate — indeterminate beneficiaries (discretionary trusts) | Section 307 | Section 164 |
| Charge of tax in case of an oral trust | Section 308 | Section 164A |
| Reporting a payment to a non-resident beneficiary or foreign payee (declaration / CA certificate) | Section 397(3)(d); Form No. 145 & Form No. 146, under Rule 220 of the Income-tax Rules, 2026 | Section 195(6); Form 15CA & Form 15CB, under Rule 37BB |
Determinate Trusts — Section 303 and Section 304
Section 303(1)(d) treats as a representative assessee "a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise... receives or is entitled to receive on behalf or for the benefit of any person." Section 304(1) then provides that the trustee "shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially" — assessed in the trustee's own name, but in a representative capacity only, and taxed "in like manner and to the same extent as it would be leviable upon and recoverable from the person represented." In practice: where beneficiaries and their shares are fixed and known, each beneficiary's portion of trust income is taxed at that beneficiary's own applicable rate — the trust structure does not itself increase the tax burden.
Discretionary Trusts — Section 307
Section 307(1) charges income to tax at the maximum marginal rate where it is "not specifically receivable on behalf or for the benefit of any one person," or where "the individual shares of the persons... are indeterminate or unknown" — precisely the position in a properly constituted discretionary trust. Section 307(5) is exacting on this point: shares are deemed indeterminate unless "expressly stated in the order of the court or the instrument of trust... and identifiable as such on the date of such order, instrument or deed" — a drafting failure to state shares with this precision can turn what was intended as a determinate trust into one taxed as discretionary.
Section 307(2) sets out three circumstances in which the lower association-of-persons rate applies instead of the maximum marginal rate: (a) none of the beneficiaries has other taxable income above the basic exemption threshold and is not a beneficiary of any other trust; (b) the income is receivable under a trust declared by will, and it is the only such trust the testator has declared — this exception is general and does not itself require the beneficiary to be a minor or dependent relative; or (c) the trust was created before 1 March 1970 by a non-testamentary instrument, bona fide, for the benefit of the settlor's relatives or, where the settlor is a Hindu Undivided Family, its members, in circumstances of dependency for support and maintenance.
Business income is treated more strictly. Under Section 307(3), where a trustee's income under Section 303(1)(d) includes profits and gains of business, that income is charged at the maximum marginal rate regardless of the Section 307(2) exceptions. The only carve-out, under Section 307(4), applies where that business income is receivable under a will trust created exclusively for the benefit of a dependent relative, and it is the only such trust the testator has declared.
Judicial Authority
In CIT v. Smt. Kamalini Khatau (1994) 209 ITR 101 (SC), the Supreme Court confirmed that where a trust is determinate, the trustee is assessed in the same capacity, and at the same rate, as the beneficiary directly. In Bhavna Shah v. CIT (2010) 326 ITR 170 (Bom), the Bombay High Court held that the fixity of each beneficiary's share — not the label given to the trust in the deed — is the determinative factor for avoiding maximum-marginal-rate taxation. Both principles continue to apply under the renumbered provisions of the 2025 Act.
Paying a Non-Resident Beneficiary or Foreign Payee
Effective 1 April 2026, the foreign-remittance reporting framework changed from Forms 15CA/15CB (filed under Section 195(6) of the 1961 Act and Rule 37BB) to Form No. 145 and Form No. 146, filed under Section 397(3)(d) of the Income-tax Act, 2025 and Rule 220 of the Income-tax Rules, 2026. Form 145 is the remitter's declaration, structured in four parts depending on the size and taxability of the remittance:
- Part A — taxable remittance not exceeding ₹5 lakh in the tax year.
- Part B — taxable remittance exceeding ₹5 lakh, where an Assessing Officer certificate/order has been obtained under Section 395(1) or (2); Form 146 is not required in this case.
- Part C — taxable remittance exceeding ₹5 lakh, where no AO certificate has been obtained; requires a Chartered Accountant's certificate in Form 146.
- Part D — remittance not chargeable to tax, subject to the exclusions in Rule 220(3).
Forms 15CA and 15CB filed for remittances made on or before 31 March 2026 remain valid within their stated period; any remittance made on or after 1 April 2026 — including a trustee's distribution to a non-resident beneficiary — must use Form 145 and, where applicable, Form 146. Authorised Dealer banks will generally not process a transfer without the Form 145 acknowledgement.
FEMA scrutiny. A trust is not treated as a separate legal person under FEMA, and banks have in recent periods increased scrutiny of large transfers from Indian family trusts to NRI beneficiaries' NRO accounts, where these may exceed the USD 250,000 annual limit under the Reserve Bank of India's Liberalised Remittance Scheme. Any distribution structure involving NRI beneficiaries should be planned, and documented, with this scrutiny in mind — transfers intended to exceed the LRS threshold require prior RBI approval.
India Does Not Levy an Inheritance Tax
India does not levy inheritance tax or estate duty. The Estate Duty Act was repealed in 1985, and no equivalent tax has been reintroduced. This is true whether assets pass by will, by intestate succession, or through distribution from a family trust. It does not, however, exempt the trust's own income from ordinary income tax as set out above, nor a later sale of trust assets from capital gains tax — both remain fully applicable and must be planned for as part of any trust structuring exercise.
Frequently Asked Questions
What is the current statutory basis for taxing a determinate private family trust?
Sections 303 and 304 of the Income-tax Act, 2025 (corresponding to Sections 160 and 161 of the repealed 1961 Act for periods before 1 April 2026). The trustee is assessed as a representative assessee and taxed exactly as the beneficiary would have been taxed had the income been received directly.
Why do discretionary trusts risk being taxed at the maximum marginal rate?
Because Section 307(1) of the Income-tax Act, 2025 charges income to tax at the maximum marginal rate wherever beneficiaries' shares are indeterminate or unknown — the position in most discretionary trusts by design. Section 307(5) requires shares to be expressly stated and identifiable in the trust instrument to avoid this treatment.
Are there any exceptions to maximum marginal rate taxation for discretionary trusts?
Yes. Section 307(2) provides for the lower association-of-persons rate where none of the beneficiaries has other taxable income above the basic exemption threshold, where the income is receivable under a will trust that is the only such trust the testator has declared, or for certain pre-1970 trusts for dependent relatives. Business income is treated more strictly under Section 307(3), regardless of these exceptions, except for the narrow will-trust carve-out in Section 307(4).
What form is required when a trust distributes income to a non-resident beneficiary?
Form No. 145 (the remitter's declaration) and, where the taxable remittance exceeds ₹5 lakh in the tax year and no Assessing Officer certificate has been obtained, Form No. 146 (the Chartered Accountant's certificate) — both under Rule 220 of the Income-tax Rules, 2026 and Section 397(3)(d) of the Income-tax Act, 2025. These replace the former Forms 15CA and 15CB effective 1 April 2026.
Does India levy inheritance tax on assets distributed from a family trust?
No. India does not levy inheritance tax or estate duty — the Estate Duty Act was repealed in 1985 and has not been reintroduced. This applies whether assets pass by will, intestate succession, or trust distribution. It does not exempt the trust's income from ordinary income tax or a later sale of trust assets from capital gains tax.
Why does the fixity of a beneficiary's share matter so much for tax purposes?
Because, per Bhavna Shah v. CIT (2010) 326 ITR 170 (Bom), the fixity of each beneficiary's share — not the label given to the trust — is the determinative factor for avoiding maximum-marginal-rate taxation. A trust intended to be determinate but drafted without expressly stating and identifying each beneficiary's share can be taxed as if it were discretionary, under Section 307(5) of the Income-tax Act, 2025.
Taxation of Private Family Trusts in India — Advice for Kerala & India
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