A private trust in India is created by a written trust deed that defines the author (settlor), trustees, beneficiaries, purpose, and property. If it involves immovable property, the deed must be registered and stamped as per state law. Ongoing compliance includes PAN, bank/demat accounts, and filing ITR-5; taxation depends on whether the trust is specific, discretionary, or revocable.
What is a Private Trust—and why set one up?
A private trust is a legal arrangement where a settlor transfers assets to trustees to hold for identified beneficiaries. The Indian Trusts Act, 1882 lays down essentials: clear intention, lawful purpose, definite beneficiaries, and identifiable trust property.
Why it matters: Private trusts help Indian families ring-fence assets, plan succession (especially for minors/special needs), segregate business vs personal wealth, and ensure continuity across generations.
Legal framework at a glance
- Creation requirements (core law): A trust is created when the settlor clearly indicates intention, purpose, beneficiaries, and trust property.
- Immovable vs movable property: For immovable property, the trust must be declared by a registered non-testamentary instrument (trust deed) signed by the settlor/trustee; movable-property trusts can be created without registration (though a deed is advisable).
- Registration law: Instruments that create/declare rights in immovable property must be registered under Section 17 of the Registration Act, 1908.
- Trustee duties & investment prudence: Trustees must act with ordinary prudence and invest trust money only in authorised/securities notified, subject to the deed.
Types of private trusts (for tax & control)
- Specific/Determinate – beneficiaries and their shares are known.
- Discretionary/Indeterminate – trustees decide distributions; beneficiaries’ shares are not fixed.
- Revocable vs Irrevocable – if the settlor retains a right to re-assume assets or income, the transfer is revocable and income is taxed back to the settlor (sections 61–63).
Step-by-step: Setting up a private trust
Step 1: Define the objective and scope
Clarify purpose (succession, education fund, special needs), asset classes (real estate, equities, MFs), and distribution logic (fixed vs discretionary). Document this as your Trust Term Sheet.
Step 2: Choose the people
- Settlor: transfers property to the trust.
- Trustees (ideally 2+): individuals or a corporate trustee with financial prudence and availability.
- Protector (optional): an overseer who can approve key actions (a practical feature; not statutory).
Essentials like who may be trustee/beneficiary are codified in the Act.
Step 3: Decide the trust type
- Irrevocable specific (common for family asset holding).
- Discretionary (flexibility; different tax outcome).
- Revocable (simple to unwind but clubbed back to settlor for tax).
Step 4: Draft the trust deed (core clauses to include)
- Name, date, place; settlor/trustee details
- Objects/purpose and beneficiaries (with definitions for class beneficiaries)
- Trust property (corpus) and future accretions
- Powers & duties of trustees (investments, distributions, borrowings, indemnities)
- Protector role (if any) and trustee appointment/removal (see Section 73 context) (Indian Kanoon)
- Meetings, accounts, audit (if desired)
- Governing law & jurisdiction
- Revocation clause (only if deliberately creating a revocable trust; note tax impact)
Step 5: Execute, stamp, and (if needed) register
- Stamp: Pay stamp duty as per your state schedule for “declaration/settlement/trust deed” (rates vary by state).
- Register: If the deed deals with immovable property, register it with the Sub-Registrar (compulsory).
- Best practice: Even for movable-only trusts, execute on proper stamp paper and notarise. The Act’s Section 5 distinguishes immovable vs movable-property trusts.
Step 6: Obtain PAN (and TAN if TDS applies)
Apply PAN for the category “Trust” (Form 49A on Protean/NSDL); then open a bank account in the trust’s name. (Protean eGov Technologies)
Step 7: Open demat / hold financial assets
Depositories (NSDL/CDSL) allow trust accounts through a DP after KYC and deed verification; follow the Master Circular and DP checklists. (NSDL, CDSL India)
Step 8: Transfer/record assets into the trust
- Property: execute transfer/assignment and update municipal and utility records.
- Shares/MFs: use DIS/off-market transfer or RTA forms as applicable.
- Cash: settle initial corpus via cheque/RTGS into the trust bank account.
Step 9: Set up governance & documentation
- Trustee meeting minutes, investment policy, distribution policy, and record-keeping.
- Ensure alignment with the prudence rule and authorised investments.
Taxation of private trusts (the practical bit)
Who is taxed? Under the Income-tax Act, the trustee is a representative assessee in respect of trust income (Chapter XV). Treatment differs by trust type:
A. Specific (determinate) trust — Section 161
Assessed in the hands of the trustee “in like manner and to the same extent” as the beneficiary; effectively, taxation mirrors beneficiary slabs/concessions.
B. Discretionary (indeterminate) trust — Section 164
If beneficiaries’ shares are unknown, tax is generally at the Maximum Marginal Rate (MMR), with limited statutory exceptions.
C. Trusts with business income
Where trust income includes business profits, tax is at MMR unless it’s a will-declared trust exclusively for a dependent relative and the only trust so declared by the testator.
D. Revocable trusts — Sections 61–63
If the settlor retains a right (direct/indirect) to re-assume assets or income, the income is clubbed back to the settlor. Choose revocability consciously, knowing the clubbing outcome.
Return filing: Private trusts ordinarily file ITR-5 (entities other than individuals/HUF/companies/ITR-7 filers). The AY 2025-26 utilities/instructions confirm ITR-5 availability, and the Department’s AOP/BOI/Trust page lists return options. (Income Tax Department)
Ongoing compliance checklist
- PAN (and TAN if TDS obligations apply) and a dedicated bank account. (Protean eGov Technologies)
- Books & minutes: keep clear accounts and furnish information to beneficiaries on request.
- ITR-5 annually; pay advance tax if applicable. (Income Tax Department)
- TDS on applicable payments (e.g., rent, contractor), and Form 15G/15H handling where relevant.
- Cross-border distributions to NRI beneficiaries: coordinate Form 15CA/CB and banking documentation before remittance; also consider FEMA/LRS implications. (Income Tax Department, Reserve Bank of India)
Documents you’ll typically need (featured snippet table)
| Step | What you’ll prepare | Where/With whom | Key notes |
|---|---|---|---|
| Drafting | Trust Deed + annexures | Lawyer/Family office | Make beneficiary definitions watertight; include trustee powers & replacement |
| Execution | Stamp paper + signatures | State stamp rules; Notary | State-wise duty; movable vs immovable distinction under Sec. 5 |
| Registration (if immovable) | Deed + KYC + photos | Sub-Registrar | Compulsory under Reg. Act Sec. 17 |
| PAN | Form 49A (Trust) | Protean/NSDL | PAN before bank/demat |
| Demat/KYC | Deed, PAN, KYC | DP (NSDL/CDSL) | Follow SEBI/DP checklists |
| Annual tax | ITR-5 + statements | Income-tax e-filing | Representative assessee rules apply |
Typical mistakes to avoid
- Vague beneficiary definitions in a discretionary trust (invites disputes and MMR by default).
- Skipping registration when immovable property is involved.
- Including a casual “revocation” right without understanding clubbing back to the settlor.
- Trustee investment drift (investing outside authorised universe or imprudently).
- Ignoring cross-border paperwork for NRI beneficiaries (15CA/CB). (Income Tax Department)
Mini case study (India-centric)
A Mumbai-based promoter creates an irrevocable, specific family trust to hold a rental flat and a blue-chip equity portfolio for two minor children. The deed fixes equal 50–50 shares. The deed is stamped and registered (immovable property), PAN is obtained, a trust bank account and demat are opened. Rentals and dividends accrue to the trust. The trustee files ITR-5; income is taxed “in like manner and to the same extent” as beneficiaries (effectively slab benefits via Sec. 161), not at MMR.
FAQs
1) Can the settlor also be a trustee?
Yes, provided capacity and prudence requirements are met; ensure at least one additional trustee for continuity and to avoid conflict.
2) Can an irrevocable trust be revoked later?
Only in limited scenarios—e.g., when all competent beneficiaries consent, or if a power of revocation was expressly reserved. Trusts created by will are revocable at the testator’s pleasure. (Indian Kanoon)
3) Do private (non-charitable) trusts need Charity Commissioner registration?
Generally no—those state Charity laws target public/charitable trusts. For private family trusts, focus on proper stamping and registration of the deed when immovable property is involved.
4) Which ITR form does a private trust file?
Typically ITR-5 (not individuals/HUF/companies/ITR-7 filers). Check the Income-tax portal’s downloads/help each year for any changes. (Income Tax Department)
5) How are discretionary trusts taxed?
Usually at MMR when beneficiaries’ shares are indeterminate, with narrow statutory exceptions (e.g., certain will trusts for dependent relatives).
Quick template: “Trust-setup to-do” (print & tick)
- Decide objective, type (specific/discretionary; revocable/irrevocable)
- Finalise trustees/protector
- Draft deed with clear beneficiary definitions, trustee powers, replacement mechanism
- Stamp and register (if immovable)
- Get PAN (and TAN if needed); open bank and demat
- Transfer assets; keep minutes and accounts
- File ITR-5 annually; manage TDS and 15CA/CB for any NRI remittances (Protean eGov Technologies, Income Tax Department)
Final word for Indian investors
A well-drafted, properly executed private trust is one of the most powerful family-governance tools in India. Get the deed right, register when required, and align structure with your tax position (specific vs discretionary; revocable vs irrevocable). This ensures better control, continuity, and tax clarity for your heirs and beneficiaries. For related topics, see our explainers on Family Trusts in India, Will vs Trust, and Capital Gains Tax on Mutual Funds (internal links).
Citations: Indian Trusts Act (creation, duties, investments), Registration Act s.17, Income-tax Act (Secs. 61–63, 160–164), ITR-5 & AOP/BOI/Trust portal pages, PAN and remittance forms. (Income Tax Department, Protean eGov Technologies)