Winding up of trust

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naresh (Querist)

07 December 2011 What are the tax implications in case of winding up of a private discritionery trust in the hands of the benefecieries as well as the trust

naresh

naresh (Querist)

07 December 2011 whether capital gain applicable if assets are transferred without consideration to its benefeciery u/s 56(2)(vii)

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

03 August 2025 Great question! Here’s a detailed overview of tax implications in the winding up of a private discretionary trust in India, focusing on both the trust and the beneficiaries, and also addressing your query on capital gains and Section 56(2)(vii).

1. Tax Implications for the Trust on Winding Up
When a trust is wound up, it usually distributes its assets to beneficiaries.

The transfer of assets by the trust to beneficiaries may attract capital gains tax in the hands of the trust if the assets are transferred for consideration or at market value.

However, if assets are transferred without consideration (i.e., gratuitous transfer), then capital gains tax liability arises depending on the nature of the assets and mode of transfer.

2. Capital Gains Tax When Assets are Transferred Without Consideration
Section 56(2)(vii) of the Income Tax Act applies when an individual or HUF receives any property (movable or immovable) without consideration or for inadequate consideration.

It taxes the recipient on the fair market value (FMV) of the property received, if it exceeds Rs. 50,000.

However, transfers from a private discretionary trust to its beneficiaries are generally exempt from this provision, provided the trust and beneficiaries fall under certain exemptions, especially if the trust deed specifies discretionary distributions.

3. In the Hands of the Beneficiaries
When beneficiaries receive assets from the trust, the transfer is generally treated as capital receipt and not taxable as income in their hands.

However, when the beneficiary subsequently sells or transfers the asset, capital gains tax will apply based on the cost of acquisition and period of holding in the hands of the beneficiary.

The cost of acquisition for beneficiaries is considered as the cost at which the trust acquired the asset, i.e., the cost to the trust.

4. Summary
Event/Aspect Tax Treatment
Trust transfers assets to beneficiaries Capital gains tax in trust's hands if transfer is at FMV or consideration; may not apply if gratuitous transfer depending on circumstances
Transfer without consideration to beneficiaries Generally no capital gains in trust's hands; no tax on beneficiaries under Sec 56(2)(vii) if it qualifies as exempt transfer
Beneficiaries on receipt of assets No tax on receipt (capital receipt)
Beneficiaries on sale of assets received Capital gains tax based on trust’s original cost and holding period

5. Additional Points
The exact tax treatment depends on:

Whether the trust is revocable or irrevocable.

Whether the trust is discretionary or specific.

Whether the trust is a registered charitable trust or a private trust.

Careful examination of the trust deed and the mode of transfer is needed.

Consultation with a tax advisor is recommended to analyze specific facts.

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