Home Income Tax What is a Trust? How Trust is Created. Type of Trust.

What is a Trust? How Trust is Created. Type of Trust.


What is a Trust? How Trust is Created. Type of Trust.

Here, we Discuss meaning of trust and how is trust created. What are the type of trust? And categories of persons involved in the creation and execution of trust.

What is a “TRUST”

As per dictionary, Trust is un arrangement by which a property is handed over to or vested in a person, to use and dispose it off for the benefit of another person.

However, ‘Trust’ is not defined under the Income Tax Act, 1961.

As per the Indian Trust Act, 1882, a trust is an obligation annexed to the ownership of a property. and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another.

Categories of persons involved in the creation and execution of trust.

Three Parties are involved in creation and execution of trust. They are the person who handle the admin work of trust. Which are as follows.

1.Author or Founder of trust: The person who create the trust is known as Founder of Trust. The person who reposes or declares the confidence.

2.Trustees: The persons who manage the trust. The persons who accept the confidence.

3.Beneficiaries: The persons for whose benefit the confidence is accepted.

How Trust is Created or Executed?

Execution of trust deed is not necessary for the creation of valid trust. The trust may be created testamentary and non-testamentary. Testamentary means a deed in writing. Similarly, Non-Testamentary means without a written deed.

Although, a trust can be an oral trust. But for the recognition as charitable institution, it should be in writing.

Evidential documents like revenue records for lands, property tax receipts, affidavits and such other documents, may be accepted in the place of a formal trust deed.

After the creation of a valid trust, the property which is transferred to the trust cannot be revoked. But, if the trust deed contains any provision for the revocation of trust, then sections 60 to 63 of Income Tax Act related to clubbing of income will be applicable and the income of the trust will be taxable in the hands of settlor as his personal income.

Subject to the provisions of sections 60 to 63, incomes of a charitable or religious trust / institution are not to be included in its total income, to the extent and subject to the conditions specified in this Act.

Type of Trust and their Meaning.

There are two type of trust. One is a Public trust and Second is a Private Trust.

In Public trust, the beneficiaries are the general public or class thereof. whereas in Private Trust, the beneficiaries are specific individuals. While in the former the beneficiaries are incapable of ascertainment. In the latter they are persons who are ascertained or capable of being ascertained.

Private Trusts are governed by the Indian Trust Act, 1882, whereas the public charitable trusts are not governed by the same.

The income of a Private trust or institution is not eligible for exemption under Income-tax Act, whereas the income of a Public Charitable trust is exempt u/s 11 of the Income-tax Act, subject to its fulfillment of the prescribed conditions.

If you like our Article, then share with your friends. If you need any help in GST, Accountancy, Income Tax, Tax Audits & Project Financing, Management Consultancy than contact us.