In our whitepaper titled Interaction of Indian and U.S. Tax Laws, I had discussed different forms of trusts in India. Basic forms include public or private trusts. In India, there are generally three parties in a trust, settlor, trustee and beneficiary.
A public trust is generally categorized for charitable or religious purposes and may be exempt from tax in India, provided it carries out specific activities, adheres to specific conditions and registered under the provisions of Indian tax law.
Private trusts are set up under the Indian Trust Act and are required to be registered under the Registration Act, 1908. A private trust, as the name suggests, is generally used as a family trust. A private trust may be set up as a revocable trust, i.e. the settlor sets up trust with the intention of revoking the trust after the purpose for it which has been created will be fulfilled. A private trust may also be an irrevocable trust, i.e., settlor sets up the trust for lifetime without a power to revoke the trust. A trustee of a discretionary (irrevocable) trust that isestablished in India will be taxed as a representative taxpayer of the beneficiaries of such trust. However, if it’s a foreign trust, then a trustee may be a representative taxpayer of the beneficiaries if all the beneficiaries are Indian residents. A determinant (irrevocable) trust is a fiscally transparent entity but a trustee may be assessed to tax in a representative capacity.
The interplay between the US and Indian trust taxation rules are important, whether before or after the trusts have been created in India. The form of the trust, regulatory permission to remit the money outside India and tax implications under the Indian and US tax laws have to be considered in deciding the efficacyof creating a trust. When transitioning assets into the trusts with family members both in and outside India, the primary decision of where the trust should be created rests on the decision of the family members with respect to use or sale of assets and long-term intention to stay in or outside India.