Trust Income Tax Filing 2025-26: Compliance & Registration Rules

What Happened?

Trust formation and governance in India continues to evolve under the Income Tax Act 2025. With increased scrutiny from tax authorities, trusts must now comply with stricter disclosure norms, registration requirements, and transparent filing procedures. This update covers the current legal framework governing trusts, their tax treatment, trustee responsibilities, and beneficiary rights as applicable from Assessment Year 2025-26 onwards.

Background & Legal Context

A trust in India is a legal arrangement where a person (settlor) transfers property to another person (trustee) who holds and manages it for the benefit of one or more beneficiaries. The taxation and regulation of trusts fall under multiple sections of the Income Tax Act 2025 and the Indian Trusts Act 1882.

Key Provisions Under Income Tax Act 2025:

• Section 164: Defines trust and specifies that income of a trust is taxed as per the trust's status (discretionary or non-discretionary)
• Section 165: Deals with calculation of income of beneficiaries from trusts
• Section 166: Addresses trustees' obligations regarding filing of returns and maintaining records
• Section 12AA: Provides registration procedure for trusts claiming charitable status
• Section 80G: Allows donors to claim deductions for donations to registered charitable trusts
• Section 139(1): Makes it mandatory for trusts to file income tax returns annually

GST Implications for Trusts: Under GST law, trusts are treated as separate legal entities. If a trust carries out any supply of goods or services exceeding the turnover threshold (₹20 lakhs for service providers, ₹40 lakhs for goods suppliers), it must register for GST and file monthly/quarterly returns.

Types of Trusts & Tax Treatment:

1. Discretionary Trusts: Where trustees have discretion to distribute income to beneficiaries. Income is taxed in the hands of the trust at the highest slab rate (as per section 164) unless distributed.

2. Non-Discretionary (Fixed) Trusts: Where beneficiaries have a fixed entitlement. Income is distributed to beneficiaries in the ratio of their entitlement and taxed in their individual hands.

3. Charitable Trusts: Exempt from taxation under section 12(1)(c) if registered with NITI Aayog or State Authority and comply with 85-15 rule (spending 85% on charitable activities).

What Does This Mean for You?

For Trust Administrators & Trustees:

• Mandatory Registration: All trusts must register under the Indian Trusts Act 1882 with the Registrar or sub-registrar. For charitable trusts, separate registration under section 12AA of Income Tax Act 2025 is required within 12 months of establishment.
• Annual ITR Filing: For AY 2025-26, all trusts (charitable or non-charitable) earning any income must file Form ITR-7 if charitable or Form ITR-4 if non-charitable earning income below ₹1 crore. This is non-discretionary and failure to file attracts penalties up to ₹10,000 per month under section 271F.
• Tax Rate Structure: Non-charitable, non-exempted trusts are taxed at 30% (basic rate) plus applicable surcharge and cess. This is significantly higher than individual rates, making proper structuring essential.
• TDS Obligations: Trustees must deduct TDS at source on payments to beneficiaries (interest, dividends, rental income) as per applicable sections (193, 194, 194A, etc.). TDS returns must be filed quarterly.
• Beneficiary Disclosure: Full disclosure of beneficiaries' names, addresses, PAN/Aadhaar, and share in income is mandatory from AY 2025-26 in the trust's income tax return.

For Beneficiaries:

• Income Reporting: Any income received from or through the trust must be reported in their individual ITR. If income from trust exceeds ₹2.5 lakhs (or ₹3 lakhs for senior citizens), filing is mandatory.
• Capital Gains: Long-term or short-term capital gains distributed by the trust retain their character in the beneficiary's hands, allowing them to claim indexation benefit (if applicable).
• Loss Restriction: Losses from trust cannot be carried forward or set-off by beneficiaries; only the trustees can adjust them in subsequent years.

GST Compliance for Trusts:

• Trusts providing taxable supplies (renting property, conducting workshops, providing services) must register for GST if turnover exceeds threshold.
• Charitable trusts providing purely charitable activities are exempt from GST under section 66(b) of CGST Act 2017.
• Input tax credit on GST paid is available only if the trust is registered and provides taxable supplies.

What Should You Do Now?

Immediate Actions for AY 2025-26:

• Audit Compliance: Get an independent audit conducted by a qualified CA if trust income exceeds ₹50 lakhs. Maintain detailed books of accounts segregating corpus, income, and distribution.
• Update PAN Details: Ensure the trust's PAN is correctly registered with current address, bank details, and beneficial ownership information with the income tax department.
• Form 10-I Filing: For charitable trusts, file Form 10-I within the prescribed time to claim exemption under section 12A/12AA. File updated Form 10-I if any changes in trust deed or beneficiaries occur.
• Maintain Records: Keep copies of trust deed, registration certificates, board resolutions, beneficiary lists, distribution statements, and bank statements for at least 7 years as per section 92(2).
• Trustee Duties Documentation: Maintain records of trustee meetings, decisions, and communications to demonstrate proper governance. This protects against disqualification under section 164A in case of misconduct.
• GST Registration (if applicable): If trust supplies taxable goods/services, apply for GST registration within 30 days of crossing the turnover threshold using Form GST REG-01.
• Beneficiary Communication: Issue formal statements to each beneficiary showing their share of income, distributions made, and any carry-forward amounts annually.
• Professional Advice: Consult with a tax advisor to optimize trust structure, minimize tax leakage, and ensure full compliance with section 139(1) filing deadlines.

Key Takeaways

• Trusts are separate taxable entities: Non-charitable trusts pay tax at 30% rate. Charitable registered trusts enjoy complete exemption if they comply with 85-15 spending rule under section 12(1)(c).
• Annual ITR filing is mandatory: All trusts must file returns even if income is below taxable limit. Use Form ITR-7 (charitable) or ITR-4 (non-charitable) for AY 2025-26.
• TDS is a trustee responsibility: Deduct and deposit TDS on beneficiary payments, interest, and dividends quarterly as per sections 193-194A to avoid penalties.
• Beneficiary income must be reported: Each beneficiary reports their share in personal ITR. Capital gains retain character, allowing beneficial tax treatment in beneficiary hands.
• GST applies to trust supplies: Trusts providing taxable supplies must register for GST. Charitable activities are exempt, but non-exempt supplies trigger GST compliance obligations.

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