Trust

Overview

In India, a Trust is a legal arrangement in which a settlor transfers property or assets to a trustee, who holds the property for the benefit of the beneficiaries. Trusts are commonly established for charitable, religious, educational, or welfare purposes. The process of incorporating a trust is different from company incorporation and is governed by the Indian Trusts Act, 1882 and relevant state laws.

Types of Trusts

•         Private Trust: A trust created for the benefit of specific individuals or families.
•         Public Trust: A trust created for the benefit of the general public, often for charitable or religious purposes.

 For charitable trusts, the registration is governed by the Indian Trusts Act, 1882, and must be registered with the relevant state     authorities.         

Advantages of Trusts

1.     Tax Benefits: Charitable trusts can avail themselves of tax exemptions under Section 12A and 80G of the Income Tax Act.

2.     Public Trust Status: Provides a legal structure for managing assets for public welfare or charitable purposes.

3.    Limited Liability: Trustees are typically not personally liable for the trust’s liabilities, except in cases of gross negligence or misconduct.

4.     Flexibility: The terms of a trust can be customized to suit the objectives of the settlor and trustees.

Process of Trust Incorporation in India

Below is a step-by-step guide for incorporating a trust:

1. Decide the Type of Trust

• Private Trust: For private family purposes.
• Public Charitable Trust: For charitable or religious purposes.

2. Draft a Trust Deed

The Trust Deed is the primary document that establishes the trust. It should clearly outline the objectives, powers, and responsibilities of the trust. The following should be included in the Trust Deed:

• Name of the Trust.
• Objectives: The purpose for which the trust is created (e.g., education, health, religious, welfare, etc.).
• Name of the Settlor: The person who is transferring the property to the trust.
• Name of the Trustees: The individuals or entities managing the trust.
• Beneficiaries: Who will benefit from the trust's activities.
• Powers and duties of Trustees: To manage the trust’s assets, execute objectives, and distribute benefits.
• Trust Property: A description of the property or assets being transferred into the trust.
• Duration: If applicable, specify the duration for which the trust will exist.

3. Sign the Trust Deed

• The Settlor (the person creating the trust) and the Trustees must sign the Trust Deed.
• The document must be executed on non-judicial stamp paper, the value of which depends on the state in which the trust is being registered. It must comply with the stamp duty laws of the respective state.

4. Register the Trust

• The Trust Deed must be registered with the local Sub-Registrar under the Indian Registration Act, 1908.
• Location: The registration should take place at the local Sub-Registrar Office where the trust is created.
• Documents Required for registration:

1.     Trust Deed (signed and executed).

2.     Proof of Identity and Address of the Settlor and Trustees (e.g., Aadhar Card, Passport, Voter ID, etc.).

3.     Passport-sized Photographs of Settlor and Trustees.

4.     Address proof of the registered office (if the trust has a designated office).

5.     NOC (No Objection Certificate) from the landlord if the trust office is rented.

• The registration of the trust deed is not mandatory in all states, but it is highly recommended, especially for Public Trusts.

5. Apply for Tax Exemption (if applicable)

• Section 12A Registration: To enjoy tax exemptions under the Income Tax Act, 1961, a trust must apply for registration under Section 12A with the Income Tax Department. This registration is needed for a charitable trust to claim tax exemptions on income generated.
• Section 80G Registration: This is required for the trust to accept donations eligible for a tax deduction under Section 80G of the Income Tax Act.

6. Open a Bank Account

• After the trust is registered, you need to open a bank account in the name of the trust.
• Documents required for opening the bank account include the Trust Deed, PAN Card of the trust, and identification documents of the trustees.

7. Other Compliance and Formalities

• Maintain Records: The trust must maintain accurate financial records, including details of donations received, expenses, and assets.
• File Annual Returns: A public charitable trust may be required to file annual returns with the Registrar of Trusts or other government bodies, depending on the state and the nature of its activities.
• Audit: Charitable trusts are generally required to have their accounts audited by a qualified chartered accountant, especially if they receive donations that require tax exemptions.

Documents Required for Trust Registration

1.     Trust Deed (on non-judicial stamp paper).

2.     Proof of Identity (PAN card, Aadhar, Passport, etc.) of the Settlor and Trustees.

3.     Proof of Address of Settlor and Trustees (e.g., electricity bills, bank statements).

4.     Passport-sized Photographs of the Settlor and Trustees.

5.     Address Proof of the Registered Office (if any).

6.     No Objection Certificate (NOC) from the landlord if the office is rented.

7.     PAN Card of the Trust (to be obtained after registration).

8.     Bank Statement or Utility Bills as proof of address of the office.

 FAQs

Is it necessary to register a Trust?

While registration of a Private Trust is not mandatory, a Public Trust (especially charitable or religious) must be registered under the Indian Trusts Act, 1882 for legal recognition. Registration is done at the Sub-Registrar Office in the jurisdiction where the trust is formed.

How can a Trust get tax exemptions?

To avail tax exemptions, a Trust must apply for registration under Section 12A and 80G of the Income Tax Act. Section 12A ensures tax exemption on the Trust’s income, while Section 80G allows donors to claim deductions on donations made to the Trust.

Can a Trust operate without a registered office?

No, even a Trust requires a registered office where it conducts its operations. The registered office must have valid address proof and should be either owned or rented.

How many Trustees are needed to form a Trust?

A minimum of two Trustees is typically required to form a Trust. There is no upper limit on the number of Trustees, but it is important to have a reasonable number to manage the Trust effectively.

What is the difference between Section 8 Company and a Trust?

• Section 8 Company: A non-profit company registered under the Companies Act, 2013 with a corporate structure, limited liability, and the ability to raise funds from the public.
• Trust: A non-profit organization governed by a Trust Deed with trustees holding property for the benefit of beneficiaries. It may not have the same flexibility as a Section 8 company in terms of governance and funding.

Can a Trust be dissolved?

A Trust can be dissolved if:

• The purpose of the Trust has been fulfilled.
• All Trust assets have been distributed to the beneficiaries.
• The Trust Deed provides provisions for dissolution.

Can a foreigner be a Trustee?

Yes, a foreigner can be a Trustee in an Indian Trust. However, if the Trust is a Public Charitable Trust, the foreign trustee must comply with any foreign contribution regulations under the Foreign Contribution Regulation Act (FCRA).

What is the duration of a Trust?

A Trust can be set up for a specific period or can have perpetual existence. However, charitable Trusts generally continue indefinitely until they are dissolved or the purpose is achieved.