TAXATION OF TRUST FOR MINOR CHILD
This query is : Resolved
13 March 2011
1)Whether trust is liable to tax , if yes ,then at what rate .
2)Whether trust will get a benefit of basic exemption .
3)How the income of trust will be taxed in the hands of trustee / beneficary
4) Whether either of parents can act as trustee for trust.
2)Whether trust will get a benefit of basic exemption .
3)How the income of trust will be taxed in the hands of trustee / beneficary
4) Whether either of parents can act as trustee for trust.
13 March 2011
1) Tax rate is as applicable to Individual.
2) Basic exemption as is available to Male below 60. i.e Rs 160000/- for ay 2011-12
3) Say if the Trust is for minor child and the income is transferred in his account the said amount will be clubbed with the income of the parent. If the amount is reinvested and same is transferred to minor's account after he becomes major the same will not be taxable.
4) Yes either or both of the parent can act as trustee.
2) Basic exemption as is available to Male below 60. i.e Rs 160000/- for ay 2011-12
3) Say if the Trust is for minor child and the income is transferred in his account the said amount will be clubbed with the income of the parent. If the amount is reinvested and same is transferred to minor's account after he becomes major the same will not be taxable.
4) Yes either or both of the parent can act as trustee.
13 March 2011
thankx Mr.Sanjay.
1)So trust income should be clubbed in hands of parents... but wht abt discretionary trust and non discretionary trusts,whether these terms make any sense.
3) So by creating trusts for minor there can be no tax planning done in regard to clubbing.
1)So trust income should be clubbed in hands of parents... but wht abt discretionary trust and non discretionary trusts,whether these terms make any sense.
3) So by creating trusts for minor there can be no tax planning done in regard to clubbing.
26 July 2025
Great set of questions! Let's break this down step by step, including the key concepts around **trusts for minor children**, **taxability**, and **clubbing provisions**, especially regarding **discretionary vs. non-discretionary trusts**.
---
### ✅ 1) **Is the Trust Liable to Tax? If Yes, at What Rate?**
Yes, a **trust** is a taxable entity. Its taxability depends on its **structure**:
#### a) **Specific (Non-Discretionary) Trust**:
* **Beneficiaries and their shares are determinate**.
* Taxable **in the hands of the trustee** in **representative capacity** as per **Section 161(1)**.
* **Tax rate = Same rate as applicable to beneficiary** (i.e., slab rates for an individual if beneficiary is a minor).
#### b) **Discretionary Trust**:
* **Shares of beneficiaries are indeterminate**.
* Taxable under **Section 164(1)**.
* **Maximum Marginal Rate (MMR)** applies (i.e., highest slab, typically 30% + cess).
✅ **Exception to MMR**: MMR **does not apply** if the trust is:
* Created by **will**,
* For the **benefit of dependent relatives**, and
* It's the **only trust** so declared by the settlor.
---
### ✅ 2) **Does the Trust Get Basic Exemption Limit?**
* In **specific trusts**, yes – the **basic exemption** (₹1.6 lakh in AY 2011–12) is available **if taxed in the hands of trustee or minor**.
* In **discretionary trusts**, since MMR applies, **basic exemption is not available**.
---
### ✅ 3) **How is the Income Taxed – Trustee or Beneficiary?**
#### 🔹 **Clubbing Provisions – Section 64(1A):**
* If income arises **to a minor child**, **it is clubbed** with the **parent's income** (whose total income is higher).
* Clubbing applies **even if a trust is created for the minor** and income is given to him through trust.
✅ **Exceptions to clubbing**:
* If the income is due to the **minor’s skill, talent, or manual work**, it won't be clubbed.
* If the income is **accumulated and given to the minor after he becomes major**, **clubbing will not apply** at that point.
---
### ✅ 4) **Can a Parent Act as a Trustee?**
Yes, **either or both parents can be trustees**, even if they are also the settlors or guardians of the minor child.
However, if a parent is trustee **and** the clubbing provisions apply, it does not help avoid tax.
---
### ✅ Tax Planning Through Trusts for Minor Children?
Realistically:
* In **non-discretionary trusts**, the income is **still clubbed** with the parent under **Section 64(1A)**.
* In **discretionary trusts**, you can try to **avoid clubbing**, but MMR will apply, eliminating most tax benefit.
🔍 **Conclusion**:
Creating a trust for a minor **does not result in effective tax planning**, unless:
* The income is accumulated and given **after majority**, or
* Structured carefully for **specific, permitted exemptions**.
---
Would you like a table comparing specific vs. discretionary trust tax treatment for minors?
---
### ✅ 1) **Is the Trust Liable to Tax? If Yes, at What Rate?**
Yes, a **trust** is a taxable entity. Its taxability depends on its **structure**:
#### a) **Specific (Non-Discretionary) Trust**:
* **Beneficiaries and their shares are determinate**.
* Taxable **in the hands of the trustee** in **representative capacity** as per **Section 161(1)**.
* **Tax rate = Same rate as applicable to beneficiary** (i.e., slab rates for an individual if beneficiary is a minor).
#### b) **Discretionary Trust**:
* **Shares of beneficiaries are indeterminate**.
* Taxable under **Section 164(1)**.
* **Maximum Marginal Rate (MMR)** applies (i.e., highest slab, typically 30% + cess).
✅ **Exception to MMR**: MMR **does not apply** if the trust is:
* Created by **will**,
* For the **benefit of dependent relatives**, and
* It's the **only trust** so declared by the settlor.
---
### ✅ 2) **Does the Trust Get Basic Exemption Limit?**
* In **specific trusts**, yes – the **basic exemption** (₹1.6 lakh in AY 2011–12) is available **if taxed in the hands of trustee or minor**.
* In **discretionary trusts**, since MMR applies, **basic exemption is not available**.
---
### ✅ 3) **How is the Income Taxed – Trustee or Beneficiary?**
#### 🔹 **Clubbing Provisions – Section 64(1A):**
* If income arises **to a minor child**, **it is clubbed** with the **parent's income** (whose total income is higher).
* Clubbing applies **even if a trust is created for the minor** and income is given to him through trust.
✅ **Exceptions to clubbing**:
* If the income is due to the **minor’s skill, talent, or manual work**, it won't be clubbed.
* If the income is **accumulated and given to the minor after he becomes major**, **clubbing will not apply** at that point.
---
### ✅ 4) **Can a Parent Act as a Trustee?**
Yes, **either or both parents can be trustees**, even if they are also the settlors or guardians of the minor child.
However, if a parent is trustee **and** the clubbing provisions apply, it does not help avoid tax.
---
### ✅ Tax Planning Through Trusts for Minor Children?
Realistically:
* In **non-discretionary trusts**, the income is **still clubbed** with the parent under **Section 64(1A)**.
* In **discretionary trusts**, you can try to **avoid clubbing**, but MMR will apply, eliminating most tax benefit.
🔍 **Conclusion**:
Creating a trust for a minor **does not result in effective tax planning**, unless:
* The income is accumulated and given **after majority**, or
* Structured carefully for **specific, permitted exemptions**.
---
Would you like a table comparing specific vs. discretionary trust tax treatment for minors?
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