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Trust - Taxation & winding up

	Taxation
	Winding up

Taxation

A Public trust is taxable entity under the Income Tax Act and the income of trust is assessable in the hands of its trustee or upon the beneficiary. The income of trust is assessable upon its trustee or any other person(s) who represents the trust. (by whatever name called) in his representative capacity. Tax shall be leviable and recoverable from the person represented i.e the trust.

1. Tax Rates
   
   

   	Income Level	Income Tax Rate
   i	Where the total income does not exceed Rs.1,50,000/-.	NIL
   ii	Where the total income exceeds Rs.1,50,000/- but does not exceed Rs.3,00,000/-.	10% of amount by which the total income exceeds Rs. 1,50,000/-
   iii	Where the total income exceeds Rs.3,00,000/- but does not exceed Rs.5,00,000/-.	Rs. 15,000/- + 20% of the amount by which the total income exceeds Rs.3,00,000/-.
   iv	Where the total income exceeds Rs.5,00,000/-.	Rs. 55,000/- + 30% of the amount by which the total income exceeds Rs.5,00,000/-.

   
   
2. Surcharge: The amount of income tax as computed in accordance with above rates, and after being reduced by the amount of tax rebate shall be increased by a surcharge at the rate of 10% of such income tax, provided that the total income exceeds Rs. 10 lacs.
   
   
3. Education Cess: 3% of the total of Income-tax and Surcharge.

Computation of taxable income

• Compute the income of a trust. Here,” income" includes voluntary contributions received by a trust/institution created wholly or partially for charitable or religious purposes. The income of a trust/institution is required to be computed as per the provisions of the Income Tax Act.
• Find out the part of income exempt under section 11 or section 12 of the Income Tax Act. Trusts/Institutions are required to register themselves under Section 12AA in order to avail the exemptions. This can be done by writing an application in Form 10A within a year from the date of setting of trust/institution. Broadly, the scheme of the provisions regarding the exemptions may be summarized as follows:-
  
  • The creation of trust must be wholly for charitable purposes and the objectives of the trust should be for charitable purposes, as defined under the Act.
  • The trust should not be created for the benefit of any particular religious community or caste.
  • The trust should not be created for carrying on business for profit.
  • The properties settle upon the trust must be held in trust. It would not suffice if only the income is held in trust.
  • The trust deed must contain a provision that the income of the trust or the property held in trust would be utilized, for charitable purposes in India.
  • It should be ensured that income or property of the trust does not ensure for the benefit of the settlor/ author of the trust or his relatives.
• Charitable or religious trusts, which may otherwise be eligible for tax exemption, are liable to forfeit this exemption under Section 13 of the Act. It is applicable in the following circumstances:-
  
  1. Where the trust is created after March 31, 1962, any part of the income of the trust ensures, under the terms of the trust deed, directly or indirectly, for the benefit of specified categories of persons such as, the author of the trust, trustee or manager of the trust, substantial contributor to the trust and any relative of such author, trustee, etc.
  2. Any part of the income or any property of the trust is used or applied during the relevant year, directly or indirectly, for the benefit of specified categories of persons.
  3. The trust funds(with certain exceptions) are invested in contravention of the investment pattern of such funds.
     
     

     Where a charitable or religious trust forfeits tax exemption in the circumstances mentioned at (1) to (3) above, the trust shall be charged to tax at the maximum marginal rate. A trust will attract the maximum marginal rate of tax only on that part of income which has forfeited exemption under the above circumstances and not on the entire income of the trust.

Other provisions relating to taxation of Trust

• Liability of trustees as 'representative assessee under section 161 wherein they are liable to tax in their representative capacity in respect of income of trust.
• Except in certain cases, Wealth tax is also not charged on properties held under trust, or other legal obligation, for public purposes of a religious or charitable nature under Section 5(i) of Wealth Tax Act.
• Persons giving donations to trust are given relief from income tax in respect of donations made to institutions established in India for charitable purpose.
• There are specific provisions relating to public charitable/religious trusts under section 10 of the act. The incomes of these trusts do not form part of total income or the incomes of such trusts are exempt from income tax.
• In certain cases, income of a charitable/religious trust, which is not subject to exemption under section 11 or section 12, may be chargeable to tax as if it is the income of an association of persons(AOP):-
  
  1. Income from property held under trust wholly for charitable or religious purposes
  2. Voluntary contributions without any direction that they shall form part of corpus of trust or
  3. Income of trust or institution being profits and gains of business which is incidental to the attainment of the objectives of trust and separate books of account are maintained.

Winding-up

A Trust created for charitable purpose can be wound-up, when the purpose /period for which the Trust is created has completed. In other cases, the Trust can be wound up in accordance with the manner prescribed under the Trust. In case of winding-up, the Trust property shall be used for discharging the dues & creditors and the surplus , after deducting the expenses of the winding up , will be handed over to the beneficiary.

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