Taxability of trust created for minor child

dear

pls post this query to the experts section

sunil

Originally posted by : komal
	3 persons wants to create a trust for the benefit of minor child [ at present only 1 beneficary ] The amt contributed by the settler shall be invested . The income on the investment shall accrue till the beneficary attain major [ ie. age of 18 yrs ] Whether trust is liable to tax , if yes ,then at what rate . Whether trust will get a benefit of basic exemption . How the income of trust will be taxed in the hands of trustee / beneficary If new beneficary is added in future ,then what will be the status of 1st beneficary        Friends, Kindly share your experienece in this regards.

There are many facts to consider here:

This question has been repeated roughly 3 times(in similar fashions) in CA Final,including November 2009(Old syllabus)

1. If the minor is not disabled then if the amount accrues only upon the minor attaining maturity then the income cannot be clubbed under Section 64(1A).This is based on Case Law CIT Vs. M.R.Doshi(Supreme Court).

2. As long as the sole beneficiary(beneficiaries in future) is/are a minor(s),the income shall be taxable in the hands of the trustee,in representative capacity,'in the same manner and to the same extent', as the beneficiary.The status of the first beneficiary will have no effect and will remain the same even upon adding new beneficiaries.

3. If however,the there is a revocable tranfer of assets to the trust in which the income is applied for the benefits of the tranferor.Then in this case Hrishikesh Ganguly Vs. CIT(Supreme Court,ITR1 160,82(1971)) ratio must be applied wherein the revocability relates to only a part of the income,then,only such part,which accrued to or was recieved by the assessee can be assessed as his income.The balance part of the income accruing to the Trust(which is accumulated to be paid upon majority) shall be regarded as "irrevocable tranfer" and not taxable in the hands of the founders of the trust(in this case the 3 persons who started the trust)(Section numbers relevant to this are Sec 61 read with section 62 of the Income Tax Act,1961)

4. Also, it would not be out of place to mention that the amount of balance income,which doesn't accrue to the minor,shall be chargeable to tax in the hands of the trust to the extent mentioned in Section 164 of the Income Tax Act,1961.

Hope this helps...

You are adviced to refer to

1. Suggested answers June 2009 Group 1

2. Direct Taxes Compiler  by Aadhyas

And also

3. The case laws referred in the above answer

Best of Luck,

Mythreya

Thanks Mythreya

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