How is a trust taxed on a property sale? | Mint

I have recently shifted my residence to Dubai. I’m a beneficiary along with my brother in a trust settled by my father in India. The trust owns a residential house along with some fixed deposits (FDs). Both my parents as well as my brother continue to live in India. Last month, the trust sold the house and invested the sale income into a new residential property. We have been advised that since the house was owned by the trust and the trust is purchasing the new property, it cannot enjoy tax exemption upon reinvestment which is otherwise available to an individual. Is this true?

-Name withheld on request

Since the beneficiaries’ shares in the trust are ascertainable, the trust qualifies as a specific trust. Moreover, as your father irrevocably settled the property into the trust, it is classified as a specific irrevocable trust. This distinction matters because the Income Tax Act, 1961 (ITA) applies different tax treatments to private revocable and irrevocable trusts, as well as to specific and discretionary trusts.

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Although the ITA does not explicitly define the status of a private trust, courts have clarified this in various cases. A trust is an obligation under the law, not a distinct legal entity. Under the ITA, trustees of a private trust act as representative assessees. For specific trusts, trustees are assessed in their own name for income explicitly earmarked for the beneficiaries. Tax on this income is levied “in the like manner and to the same extent” as it would be on the beneficiaries directly.

In Commissioner of Wealth Tax, AP vs Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust [1977] 108 ITR 555 (SC), the Supreme Court clarified that the trustee’s assessment mirrors the beneficiary’s status. The trustee’s tax liability matches what each beneficiary would owe if assessed directly. In this case, since the trustee’s status aligns with the beneficiaries, the trustee would be assessed as an individual, and your non-resident status would not alter this conclusion.

The ITA allows taxation of income either in the trustee’s hands (as a representative assessee) or directly in the hands of the beneficiaries. In your case, the capital gains from the sale of the residential property can be assessed in the hands of the trustee or split between you and your brother as beneficiaries.

Importantly, the reinvestment exemption under section 54 of the ITA can still be claimed. Whether the tax is levied on the trustee in a representative capacity or directly on you and your brother as individuals, the exemption applies.

The income tax department might contest the exemption under section 54 on the grounds that the reinvestment was made by the trustee and not directly by the beneficiaries. However, judicial precedents have established that eligibility for section 54 exemption does not hinge on the source of funds or the entity making the reinvestment. You can rely on these rulings to substantiate your claim.

Harshal Bhuta is partner at P. R. Bhuta & Co. Chartered Accountants