[Opinion] Taxation of Private Trusts under the Income Tax Act 2025

Mukesh Kabra – [2026] 185 taxmann.com 425 (Article)

Understanding entry, operational and exit taxation of family trusts in the post-2026 regime

1. Introduction

Private trusts, often referred to as family trusts, have increasingly emerged as a preferred vehicle for succession planning among business families and high-net-worth individuals. While their legal foundation lies in the Indian Trusts Act, 1882, their tax treatment is governed by the Income-tax Act, 2025, which has come into force from 1st April 2026.

Unlike public charitable trusts, private trusts do not enjoy a separate exemption regime. Instead, they are taxed through the concept of a representative assessee, making the structure both flexible and, at times, complex. With the introduction of new provisions relating to deemed transfer and distribution, the taxation of private trusts now requires a more careful and structured approach, particularly from a succession planning standpoint.

2. Trust vs. Will

Succession planning in India is commonly executed either through a will or a trust, but the two operate on fundamentally different principles. Both of these modes are having its specific characteristics. A chart of major difference between both modes are as follows:

Particulars	Trust	Will
Governing Law in India	Indian Trusts Act, 1882 and Income Tax Act	Indian Succession Act, 1925 and Income Tax Act
Timing	Operates during life time (Inter Vivos) or after a lifetime	Operates after a lifetime
Control and Transmission	A trust, allows continuing control even after death though – Staggered distribution, conditional benefits (education, marriage, etc.) and restriction on sale of core family assets.	A will is a one-time transmission instrument. Once executed, assets pass absolutely to heirs. There is no post-transfer control.
Probate and Litigation	A trust does not need probate which ensure confidentiality, faster transition and minimal court intervention.	A will is subject to probate which is time consuming and often litigating.
Flexibility	A trust provides flexibility – Trustees can adjust distributions based on circumstances, Useful where beneficiaries are minors, financially immature, or vulnerable.	A will provides certainty but rigidity — distribution is fixed.
Assets Protection	Trust structure creates legal ownership with trustee and beneficiaries have only beneficial interest hence have larger degree of assets protection.	Assets inherited via will become absolute property of heirs which is exposed to creditors, and subject to matrimonial disputes.

3. Taxation Framework – Income Tax Act, 2025

Private trusts are taxed under Chapter XVII of the Income Tax Act, specifically provisions are contained in sections 302 to 308. The Income-tax Act, 2025 continues the principle of taxing trusts through the mechanism of a representative assessee, wherein the trustee is assessed in respect of income received on behalf of beneficiaries.

The classification of trust into specific trust and discretionary trust is the main point to determining the rate and manner of taxation.

1. Specific Trust – Pass though in Substance – Specific trust is the trust wherein beneficiaries and their shares are known or identifiable. For being treated as specific trust, Sec 307(5) makes it clear that such person should be identifiable on the date of court order, Instrument of the trust or waqf deed etc and shares should be expressly stated in the Court order, Instrument of the trust, Waqf deed etc. If person is not identifiable or shares is not expressly stated then it will be deemed to be discretionary.

In such cases, the law mandates that income shall be taxed in the hands of the trustee in the like manner and to the same extent as it would have been taxed in the hands of the beneficiaries if not having business profession income . This effectively treats the trust as a pass-through vehicle, aligning the tax liability with the individual profiles of beneficiaries.

2. Discretionary Trust – Discretionary trust is trust wherein either beneficiary or shares of the beneficiaries are not known or certain. the statute prescribes taxation at the Maximum Marginal Rate (MMR), as the income cannot be attributed to any specific person with certain exceptions such as:

– The trust which is not having B/P Income, AND

– None of the beneficiaries has taxable income and Beneficiary is not the beneficiary in other trust. OR

– If the trust is declared through will and the said trust is the only trust declared by the settlor. OR

– Such trust is created before 1st March, 1970 and trust was created exclusively for the benefit of relatives of the settlor, OR

– Such income is received by trustee on behalf of PF, Super annuation fund, Gratuity Fund etc created by a person carrying business or profession exclusively for the benefit of persons employed in such business and profession.