Taxation and Regulation of Trusts: Complete Notes (Part K)

Part K covers the tax and regulatory framework that surrounds trusts: the taxation of private trusts, the exemption regime for charitable and religious trusts, and the foreign contribution and anti-money-laundering rules. This consolidated note covers Topics 47 to 49. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, carrying forward the principles below under new section numbers.

1. Private Trusts

Situation	Tax treatment
Trustee generally	Representative assessee, taxed in the like manner and to the same extent as the beneficiary; beneficiary may be assessed directly
Specific trust (determinate shares in the instrument)	Each share taxed at that beneficiary's rates (Nizam's Family Trust, 1977)
Discretionary trust (indeterminate shares)	Maximum marginal rate, with exceptions: beneficiaries below the exemption limit, a sole testamentary trust for dependent relatives, certain old family trusts, employee funds
Business income	Generally maximum marginal rate, except a sole testamentary trust for dependent relatives
Revocable transfer	Income taxed in the transferor's hands; irrevocable for the beneficiary's life is outside while it remains so
Benefit of spouse or son's wife	Clubbing with the transferor's income
Gift to a trust solely for the transferor's relatives	Not taxable as income of the trust; settlement by gift or irrevocable trust is not a transfer for capital gains

2. Charitable and Religious Trusts

Conditions: registration; charitable or religious objects; application of at least 85 per cent of income or proper accumulation; no benefit to the author, trustees, substantial contributors or relatives; permitted investments; commercial activity within limits; audited accounts.
2025 Act: a consolidated code for registered non-profit organisations (reported as Sections 332 to 355), with a single registration route, specified income (large anonymous donations, insider benefits, application outside India, non-permitted investments) taxed at 30 per cent, accreted income tax on cancellation, conversion or improper dissolution, and separate approval for donors' deductions; existing registrations continue to expiry.
Case law: general public utility entities must keep commercial activity within statutory limits (AUDA, 19 October 2022); educational institutions must exist solely for education (New Noble Educational Society, 2022).
Private religious trusts are not exempt.

3. Foreign Contribution and Money Laundering

FCRA, 2010: registration (five years, renewable) or prior permission; since 2020, no onward transfer, administrative expenses capped at 20 per cent, receipt only in the designated SBI, New Delhi account, identification of office bearers; upheld in Noel Harper (8 April 2022). An amendment Bill on asset takeover after cancellation was introduced on 25 March 2026.
PMLA rules: identification of a trust's author, trustees, beneficiaries with 10 per cent or more interest and persons with ultimate effective control (threshold lowered from 15 per cent on 7 March 2023); NPO clients registered on DARPAN; records kept five years.
Trust service providers: since May 2023, professionals acting as or arranging trustees of express trusts for clients are reporting entities.
Other disclosure: Companies Act Sections 89 and 90 for shares held through trusts; income tax disclosures; benami law for sham trusts.

⚠ Key point

Part K in one line: private trusts are taxed through the trustee as representative assessee, at beneficiaries' rates where shares are fixed and at the maximum marginal rate where they are discretionary, with revocable transfers taxed on the transferor; charitable and religious trusts are exempt if registered, applying 85 per cent of income and avoiding insider benefit, now under the 2025 Act's code for registered non-profit organisations; and foreign funds and beneficial ownership are controlled by the FCRA and the PMLA rules.

4. The Topics of This Part

Topic 47: Taxation of private trusts
Topic 48: Taxation of charitable and religious trusts
Topic 49: Regulatory compliance: FCRA, PMLA and beneficial ownership