Private Trust- Rules for tax planning

Rules for tax planning


Private Trust- Rules for tax planning

Optimum use of basic exemption limit is one of the most powerful tax planning tools. More taxable person or entities in the family results in optimum tax benefit. Certain Trust offers the benefit of basic exemption limit. How to create it?, when it will be eligible for basic exemption limit?, Who should be beneficiary and who should not be? etc are often the question raised by taxpayers and tax professionals.

The issue is very vast and interesting too. It is difficult to digest all such issue at one go. However, we are trying to attempt it. This is also an opportunity for the tax professionals from the value addition perspective for their clients. The taxpayers can also have comfort by planning their affairs in such a way that the family is secured as well.

We will try to cover all such question in our next write up on the basis of response and query received by us from our readers.

To begin, there are certain precautions, many of which are not known, here is a beginners material for private taxation trust.

  1. If in the Business activity, maximum marginal tax liability emerges.
    Rule-1: No business activity. Trust should be planned in such a way that it has income from
  2. Rent of house property.
  3. Capital gains.
  4. Income from interest or dividend.
  5. There is one exception to the rule that the trust should not carry out business so as to be taxable on the basis of income tax slab applicable to individual [Clause (ii) to section 164(1)].
    Rule-2: The exception is with respect to the trust created through Will, subject to following precaution:
  6. the beneficiaries mentioned in the WILL are not beneficiaries in any other trust.
  7. the beneficiaries are relatives of the person writing the WILL.
  8. the beneficiaries are dependent on the writer of the WILL.
  9. Care for clubbing provision should always be the prime concern whenever thinking of forming a trust. More particularly, minor income attracts clubbing provision in the hands of parents. So is the case of daughter in law and spouse.Rule-3: Care should be taken to get the gift from persons who are relatives. In this way, the clubbing provision shall not be invoked.


  10. Various exempt income is an exempt income for trust as well.
    Rule-4: Trust can earn exempt income. Even a private trust can become partner in a firm whereby share of profit in the firm shall be exempt in the in the hands of the trust.


  • Oral trust are charged to tax at maximum marginal rate resulting in no tax benefit from the taxation point of view.
    Rule-5: Trust should be in writing.



  • There is section 164(1) in the Income Tax Act-1961 and also an exception to it in the first proviso whereby beneficiaries like unborn son or daughter or would be husband should not be beneficiary in any other trust.Rule-6: Only one trust should be there for the beneficiary.



We will attempt to cover various issues related to trust in our subsequent write ups.