Tax on Settling Private Company Shares in a Trust: An Interactive Guide
Master the complex tax rules in India for transferring shares to a private trust. This guide covers capital gains, gift tax exemptions, and income clubbing for settlors, trusts, and beneficiaries.
The Key Players
A trust involves three primary roles. Click on each card to understand who they are and their function in the process of settling shares.
The Settlor
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The Trustee
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The Beneficiary
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The Process Flow
Transferring shares to a trust follows a clear legal path. This diagram illustrates the typical steps involved. Click each step for a brief explanation of what happens at that stage.
Settlor Creates Trust
Drafts & Registers Trust Deed
Shares Transferred to Trust
Trust Manages Assets
Tax Scenarios: Revocable vs. Irrevocable Trusts
The tax treatment of the share transfer depends heavily on the nature of the trust. Use this tool to see how different trust types affect the tax liability for each party involved.
Key Income Tax Act Sections for Trusts
Several sections of the Income Tax Act govern these transactions. Click on each provision to see a simplified explanation of its role.
This section taxes the receipt of property (including shares) for inadequate consideration or without consideration. However, it provides an exemption for property received from a relative or under a will, inheritance, or in contemplation of death. A transfer to an irrevocable trust for the benefit of relatives of the settlor is generally exempt under this clause.
These provisions are crucial for revocable trusts. They state that if a person can reassume power over the assets or income (i.e., the trust is revocable), any income generated by those assets will be "clubbed" with the settlor's income and taxed in their hands, not the trust's.
When an asset is acquired through a gift or under a will/trust, the cost of acquisition for the recipient (the trust) is deemed to be the cost for which the previous owner acquired it. This is important for calculating capital gains if the trust later sells the shares.
Tax Rate Comparison: Individual vs. Trust (MMR)
This chart shows a general comparison of how income might be taxed. A private trust is often taxed at the Maximum Marginal Rate (MMR), which can be significantly higher than individual tax slabs, especially at lower income levels.
