Trusts or foundations have been the most widely used entity form to pool, protect and administer assets. Our whitepaper, Interaction of Indian and U.S. Tax Laws, discusses the various forms of trusts and tax treatment of foreign and Indian trusts.
The different parties in a trust are settlor, trustee and beneficiaries. A trust distributing capital or corpus settled in by a high net worth Indian settlor is not taxed in India. However, income distribution by a trust is taxable in India in the below manner:
by an Indian trust to an Indian resident or nonresident beneficiary
by a foreign trust to an Indian resident or nonresident beneficiary
if settlor settles the assets in a revocable trust, the Indian resident settlor will be taxable during his lifetime as the trust is a flow through entity.
if settlor settles the assets in an Indian irrevocable (discretionary) trust, the trustee will be taxable on the trust income, in a representative capacity. However, a trustee will not be taxable where there is a nonresident Indian beneficiary who falls into a benefit category of an international tax treaty.Income will not be taxable to the beneficiaries at the time of distribution if the trust income is taxable to the trustee.
if all beneficiaries are Indian residents, then the trustee will be taxable, in representative capacity in India. However, the tax event will only arise when the foreign trust makes an actual distribution to Indianresident beneficiaries.
if beneficiaries are Indian nonresidents, there is no income to be taxed in India.