Most people who set up a family trust think about protection and succession. Tax is an afterthought. That can be a costly mistake.

How a trust is taxed in India comes down to one question: are the beneficiary shares fixed or not? Get it right and the trust can be very tax-efficient. Get it wrong and it could pay nearly 43 percent tax on every rupee it earns.

This blog explains how income tax works on private and family trusts. It covers what a private trust is, how each type is taxed, revocable transfers, capital gains, minor children, and how a trust compares with an HUF.

Key Highlights

• India replaced the Income Tax Act 1961 with the Income Tax Act 2025 from 1 April 2026. Trust tax rules are the same. Section numbers have changed

• The trustee pays tax as a representative assessee on behalf of the beneficiaries

• A specific trust has fixed shares for each beneficiary. It is taxed under Section 161 at individual slab rates

• A discretionary trust has no fixed shares. It is taxed under Section 164 at the maximum marginal rate

• For AY 2026-27 the maximum marginal rate is approximately 42.74 percent including surcharge and cess

• Income from a revocable trust is taxed in the settlor's hands under Section 61. The trust saves no tax

• Capital gains follow the same split as other income depending on trust type

• Income from trust assets settled by a parent for a minor child is clubbed with the parent income under Section 64

What Is a Private Trust?

A private trust is a legal arrangement where one person, known as the settlor, transfers property to a trustee to hold and manage for the benefit of specified individuals. These beneficiaries are often family members such as a spouse, children or parents.

The Indian Trusts Act, 1882 provides the general legal framework for private trusts in India. Once assets are validly transferred to a trust, the trustee holds them for the benefit of the beneficiaries and manages them according to the terms of the trust.

For income-tax purposes, private trusts are commonly classified as specific trusts or discretionary trusts. This distinction is important because the way the beneficiaries' shares are determined can affect how the trust's income is taxed.

What Is a Representative Assessee?

When a trust earns income, the trustee generally acts as the representative assessee for income-tax purposes. In this capacity, the trustee is responsible for complying with the tax requirements applicable to the trust, including filing the return and paying tax where applicable.

The tax treatment can differ depending on whether the trust is specific or discretionary, along with other factors such as the nature of the income and the beneficiaries.

What Is a Specific Trust?

A specific trust is a trust where the beneficiaries and their respective shares are in the trust deed. The trustee does not have discretion to decide how much income each beneficiary will receive.

For example, a trust may provide that the trust's income will be divided equally between two children. Each child's share is known in advance.

For income-tax purposes, where the relevant conditions are met, the trustee is generally assessed in the same manner and to the same extent as the beneficiary. This means the tax treatment can broadly follow the beneficiary's applicable tax rate.

In simple terms: the beneficiaries' shares are fixed or determinable, so the tax treatment can be linked to those defined shares.

What Is a Discretionary Trust?

A discretionary trust is a trust where the beneficiaries may be identified, but their individual shares of the trust's income or assets are not fixed in advance. The trustee has discretion to decide how and when income is distributed among the beneficiaries, according to the terms of the trust deed.

For example, a trust may name three children as beneficiaries but give the trustee discretion to decide how much income each child receives each year based on their needs.

For income-tax purposes, the income of a discretionary trust is generally taxed at the maximum marginal rate, subject to the exceptions and conditions provided under the tax law.

In simple terms: the beneficiaries are identified, but their shares are not predetermined, so the tax treatment is generally different from that of a specific trust.

What Is the Difference Between a Specific Trust and a Discretionary Trust?

This is the most important question in trust taxation. The table below shows the key differences between the two.

Source: Income Tax Act 1961, Sections 161 and 164.

How Is a Specific Trust Taxed?

A specific trust is taxed under Section 161 of the Income Tax Act 1961. The income is divided by each beneficiary’s share and taxed at their individual rate.

Each beneficiary gets their own slab and basic exemption. If a beneficiary has no other income and their share is below the exemption, they may pay no tax at all. This is the main tax benefit of a specific trust.

There is one exception. If the trust earns business income, the entire trust income is taxed at the maximum marginal rate. Slab rates can still apply even with business income but only if all three conditions below are met:

• The trust was created through a Will

• It was created only for a relative who depended on the settlor for support

• It is the only trust the settlor declared

How Is a Discretionary Trust Taxed?

A discretionary trust is taxed under Section 164 of the Income Tax Act 1961. The shares are not fixed so the law cannot use individual slab rates. The entire income is taxed at the maximum marginal rate with no basic exemption.

For AY 2026-27 this is approximately 42.74 percent. It includes the 30 percent base rate, the highest surcharge, and the 4 percent cess. Many families set up discretionary trusts without knowing this.

There are exceptions. The maximum marginal rate does not apply if no beneficiary has income above the basic exemption limit. It also does not apply if no beneficiary is part of any other trust. And it does not apply if the trust was created by a Will and is the only trust the settlor declared. These exceptions need careful drafting.

How Are Capital Gains Taxed in a Private Trust?

Capital gains earned by a private trust are subject to the specific capital-gains provisions of the Income-tax Act. The applicable tax treatment depends on factors such as the type of asset, whether the gain is short-term or long-term, and the applicable provisions.

The fact that a trust is specific or discretionary does not, by itself, mean that all capital gains are taxed at the beneficiary's rate or at the maximum marginal rate. Capital gains may be subject to specific rates under the capital-gains provisions, even where the trust is otherwise subject to different rules for its other income.

This distinction is important for families considering transferring property, shares or other capital assets to a trust. The tax consequences of transferring and subsequently selling those assets should be considered when structuring the trust.

What Is a Revocable Transfer and How Is It Taxed Under Section 61?

A revocable transfer is when the settlor puts an asset in the trust but keeps the right to take it back. This could be a clause that lets them dissolve the trust or take back control.

Under Section 61 of the Income Tax Act, income from a revocable transfer is taxed in the settlor hands. The law sees the settlor as the real owner. The income goes into the settlor return as if the trust does not exist. A revocable trust saves no tax at all.

The exception is when the transfer is irrevocable during the beneficiary lifetime and the settlor takes no benefit from the income. In that case Section 61 does not apply. The income is taxed in the trust or beneficiary hands.

This is why most tax-efficient trusts are irrevocable. Once the settlor wants the option to take assets back, the tax benefit is gone.

How is the Income of Minor Children Taxed in a Trust?

If a parent settles assets in a trust for a minor child, the income is clubbed with the parent income under Section 64. This happens even if the trust deed says the income belongs to the child.

The law looks past the trust and puts the income in the parent return. Rent, interest, and dividends are always clubbed until the child turns 18. Income the minor earns from their own skill is not clubbed.

Once the child turns 18, their trust income is taxed in their own hands at their own slab rates.

What Is the Difference Between a Trust and an HUF for Tax Purposes?

HUF stands for Hindu Undivided Family. HUF vs trust is one of the most common questions for Hindu families. Both pool family assets but the tax treatment is very different.

An HUF may offer tax advantages for certain Hindu families, while a trust can provide greater flexibility in how assets are held and distributed, including for non-family beneficiaries. The right structure depends on the family's assets, objectives and tax position.

Does a Trust Need to File Its Own Tax Return?

Yes. A private trust must get its own PAN and file a tax return if it earns taxable income. The trustee files as representative assessee. The income does not appear in the settlor or beneficiary return.

AasaanWill's trust formation service helps families set up the trust deed with the right tax structure and coordinates the PAN application and registration.

How AasaanWill Helps With Trust Formation?

AasaanWill helps families structure and set up trusts based on their succession goals, beneficiaries, assets and long-term management needs. Our team assists with:

• Drafting trust deeds with clearly defined beneficiaries and distribution provisions, while considering the tax implications of the chosen structure

• Advising on revocable and irrevocable structures, including their implications for control, ownership and taxation

• Explaining applicable clubbing provisions, including the rules that may apply when assets are settled for the benefit of minor children

• Comparing HUF and trust structures where both may be relevant to the family's succession and wealth-planning objectives

• Assisting with trust PAN application, registration and ongoing tax compliance, including annual tax filing where applicable

The tax treatment of a trust depends on several factors, including whether it is specific or discretionary, whether it is revocable or irrevocable, the nature of its income, the beneficiaries and the applicable tax provisions. AasaanWill helps families consider these factors while structuring their trust.

Conclusion

Trust taxation in India depends heavily on how the trust is structured. Specific and discretionary trusts can have very different tax treatment, while revocable arrangements may result in income being taxed in the settlor's hands. Clubbing rules can also apply where minor children benefit from trust assets.

Choosing the right trust structure is therefore both a tax and succession-planning decision. AasaanWill helps families understand these implications and structure their trusts around their long-term goals.

Frequently Asked Questions

1. What is income tax on trust in India?

Income tax on trust in India is paid by the trustee as a representative assessee. A specific trust pays at individual slab rates under Section 161. A discretionary trust typically pays at the maximum marginal rate under Section 164.

2. What is a private trust in India?

A private trust is when one person transfers property to another entity created for the benefit of  certain individuals. It is governed by the Indian Trusts Act 1882. For tax purposes it could either be a specific trust or a discretionary trust.

3. How Is a Private Trust Taxed in India?

A specific trust is generally taxed under Section 161, with the trustee assessed in the same manner and to the same extent as the beneficiary, subject to applicable provisions. A discretionary trust is generally taxed under Section 164 at the maximum marginal rate, subject to applicable exceptions. For AY 2026–27, this rate can be approximately 42.74% including surcharge and cess, depending on the nature and amount of income.

4. What is the difference between a specific trust and a discretionary trust?

A specific trust fixes each beneficiary share in the deed. It is taxed at slab rates under Section 161. A discretionary trust gives the trustee freedom to decide distributions. It is taxed at the maximum marginal rate under Section 164 with no basic exemption.

5. How is a specific trust taxed in India?

Under Section 161, the income is split by each beneficiary share and taxed at their individual rate. Each beneficiary gets their own basic exemption. Business income is an exception and is always taxed at the maximum marginal rate.

6. How is a discretionary trust taxed in India?

Under Section 164, the entire income is taxed at the maximum marginal rate of approximately 42.74 percent for AY 2026-27. There is no basic exemption. Tax starts from rupee one unless narrow exceptions apply.

7. What is Section 61 and how does it apply to a revocable trust?

Section 61 provides that income arising from a revocable transfer of assets is generally taxed in the hands of the transferor (settlor), subject to specific exceptions. In such cases, the trust does not shift the income-tax liability away from the settlor.

8. What is a revocable trust and does it save tax?

A revocable trust is one where the settlor retains a right to reassume the assets or otherwise revoke the transfer, subject to the terms of the trust and applicable law. Generally, income from assets transferred through a revocable arrangement is taxed in the settlor's hands under the applicable provisions. Simply creating a trust therefore does not automatically reduce the settlor's income-tax liability.

9. What happens to capital gains in a trust?

A discretionary trust is generally subject to the maximum marginal rate under Section 164 when the beneficiaries' shares are indeterminate or unknown. However, capital gains may be subject to specific capital-gains tax rates under the applicable provisions, rather than automatically being taxed at the maximum marginal rate.

10. What is Section 64 and how does it affect trust income for minor children?

Under Section 64, income from trust assets settled by a parent is clubbed with the parent income until the child turns 18. Once the child turns 18, their trust income is taxed in their own hands.

11. What is HUF and how is it different from a trust for tax purposes?

HUF stands for Hindu Undivided Family. An HUF gets its own basic exemption and pays tax at slab rates. Only Hindu, Sikh, Jain, or Buddhist families can use it. A specific trust gives each beneficiary their own slab benefit. A discretionary trust pays the maximum marginal rate with no exemption.

12. Does a private trust need a PAN and tax return?

Yes. A private trust must get its own PAN and file an income tax return if it earns taxable income. The trustee files as representative assessee. The trust is a separate tax entity.

13. How is a testamentary trust taxed?

A testamentary trust is created in a Will and starts after the settlor dies. If the Will fixes the beneficiary shares, it is taxed at slab rates under Section 161. If the Will gives discretion, it is taxed at the maximum marginal rate under Section 164.

14. What is Section 161 of the Income Tax Act?

Section 161 covers specific trusts where beneficiary shares are fixed. Each share is taxed at the rate that applies to that beneficiary individually. Each gets their own slab and basic exemption.

15. Can AasaanWill Help Set Up a Tax-Efficient Trust?

Yes. AasaanWill's trust formation service helps families structure trusts based on their succession goals, beneficiaries, assets and tax considerations. The team assists with drafting trust deeds with clearly defined beneficiary provisions, trust PAN application and advising on revocable and irrevocable structures, including their legal and tax implications.

Disclaimer

This article is for general informational purposes only and does not constitute legal or tax advice. The information reflects the law as of the date of publication. Tax laws change frequently. For advice on your specific situation, please consult a qualified chartered accountant or tax advisor.

"Set up a trust that works for your family and your tax plan. Start with AasaanWill today."