Trust in India : Its legal Framework

Trusts in India

Trust is the asset or property entrusted by the Settler (the author of the trust) to the Trustees who manages it for the benefit of the beneficiaries of the Trust. In other words, the Settler entrusts the property to the Trustees for the beneficiaries in a Trust.

Trust is thereby an arrangement where a person (a trustee) holds property as its nominal owner for the good of one or more beneficiaries. The trustee will administer the property for the benefit of the beneficiaries in the manner provided for in the trust deed. The person creating the trust is called its author or Settler.

Reason for creating a trust

The reason for creating a trust is that it is an effective tool for the proper management and protection of property. A trust is the only manner, other than writing a will, by which a person can exercise control over his property after his death.

A trust segregates control of the property from its ownership. A trust can safeguard property against future claims of creditors on the assets in case of bankruptcy, as the creator of the trust ceases to have ownership over the trust property.

Types of trust

The trusts in India are broadly categorised into two types: Private Trusts and Public Trusts. The Public Trusts are further divided into Charitable Trusts and Religious Trusts.

Private Trust: A Private Trust is created by the Settler for the benefit of one or more specific individuals as its Beneficiary. A private trust is the one whose beneficiaries include families or individuals. For example, a trust created for relatives and friends of the Settler.

Public Trust: A Public Trust is created for the benefit of the general public or a particular group of people. The beneficiaries in the case of Public Trust can be the general public at large.  A public charitable trust must be for charity, must be public in nature and must have public as beneficiaries, though the beneficiaries are not public at large. The public is an uncertain and fluctuating body of person and that is not ascertainable easily.

The Public Trust is again classified into two parts: Public Charitable Trust and Public Religious Trust.

Manner of creating a Trust

A public charitable or public religious institution can be formed in India either as a trust or as a society or as a company.

A Trust can be formed primarily by one or more persons. A Society can be formed by at least seven persons. Institutions engaged in the promotion of art, culture or commerce are often registered as non-profit companies. A non-profit Company for promotion of art, culture or commerce can be registered under Section 25 of the Companies Act, 1956.

Laws under which Trusts are formed in India

The Private Trusts can be created under the Indian Trusts Act, 1882. The Public Trusts in India are usually governed by state-specific legislation and are created under specific laws such as Societies Registration Act, 1860, Companies Act, 1956, Bombay Public trust Act, 1950, Madhya Pradesh Public Trust Act etc.

The Charitable and Religious Trust Act, 1920 aims to provide facilities for the obtaining of information regarding trusts created for public purposes of a charitable or religious nature, and to enable the trustees of such trusts to obtain the directions of a Court on certain matters, and to make special provision for the payment of the expenditure incurred in certain suits against the trustees of such trusts.

Who can create a Trust?

A Trust can be created by any person above 18 years, who is mentally sound and is competent to deal with property. The legal entities such as Hindu Undivided Family, Association of Persons, Company etc can create a Trust.

When a Trust is created by or on behalf of a minor, the authorization of the District Court in the place is required.

Parties Involved in Trust Formation

The Settler, Trustees and Beneficiaries are the three parties involved in the trust formation.

Settler: The Settler is a person who creates the Trust by placing a certain asset that he/she owns into the Trust. Settler is also known as Trustor or Grantor.

Trustee: The Trustee is the person who holds the assets for the benefit of the Beneficiary. The Trustee is under a legal obligation to maintain the trust properties for the benefit of the beneficiaries. The Trustee is legally prevented from using the trust assets for his own purposes.

Beneficiary: The Beneficiary is the third party who enjoys the benefit of the Trust property held & managed by the Trustee. The Beneficiary may be either named in the Trust Deed. They are a defined group of persons such as devotees, poorly abled children, cancer surviors etc.

Drafting a Trust Deed

The Trust Deed is the document with which the Trust is created.  The Trust Deed has to be drafted and executed on appropriate non-judicial stamp paper.

A trust is created by the author or settler specifying who are the Trustees. There should be at least two trustees to form a Trust, but there is no bar on the maximum numbers of trustees.

The Settler can become the sole trustee or one of the trustees. The Settler should be residing in India. The Settler can also become the beneficiary under the trust but jointly with another person. He cannot be the sole beneficiary of a trust created by himself.

The Trust deed should include the name of the trust, objects of the trust, operation of the trust, trustee information and trustee powers, rights, duties and liabilities, appointment or Resignation or Termination of Trustees, application of Trust Property, other important matters etc

Registration of Trust Deed

After the creation of the trust deed, the trust will have to be registered with the Sub-Registrar. The Sub-Registrar would retain a photocopy of the Trust deed and return the original registered Trust Deed back to the settlor. After the registration process, the registration certificate would be issued.

The documents required for registering a trust deed are: trust deed on stamp paper with the required stamp duty, passport size photo and proof of residence ID, passport size photo and proof of identity of two trustees, and passport size photos and proof of identity of two witnesses.

The Settler is required to put his signature on every page of the copy of the Trust Deed.  The settlers and two other witnesses should be present along with their identity proof at the time of registration. Memorandum of Association should be drafted as it provides for the relationship between the Settler and the Trustees.

The final step in Trust Registration is to apply for the allotment of PAN number and TAN. Further, apply for the Bank Account to which all donations shall be deposited.

Income Tax Certificates for charitable trusts u/s 12A /12AA

The registration of trust or charitable institutions under section 12A /12AA of the Income Tax Act, 1961 indicates that the Income Tax authorities recognise them as institution or trust established for a charitable purpose.

Such institutions are exempted from paying income tax, subject to some other requirements. The Section 12A deals with institutions and trusts registered before 1996, and Section 12AA deals with institutions and trusts registered after 1996.

The organisations have to obtain a 12A certification to avail tax benefits, regardless of whether they are constituted as a society, trust or not-for-profit company. The Section 12 A Certificate enables the Trusts or NGOs not to pay Income Tax on its surplus income for its lifetime.

The application for registration under section 12A can be made to the Commissioner of Income-tax (Exemption) after the registration of NGO.

Under 80 G donors are exempted from income tax

The Section 80G of the Income Tax Act exempts a person part or fully from paying taxes, if he has made donations to charitable trusts or section 8 company or a charitable organization or trust registered under section 12 A of the act. The donors of that Trust / NGO can claim exemption from Income Tax if the organization has obtained 80-G Certificate from the income tax department.

In order to get the 80G certificate, the organisation has to fill Form 10G and attach its activity report for the past three years, or at least a year, with the audited report right from the date of establishment or of the past three years.

Suit against a Public Charitable Trust u/s 92 CPC

In case of any alleged breach of trust in a charitable or religious trust, two or more person or the Advocate General can institute a suit in the Principal District Court, with the permission of the court, for getting a court direction on matters listed under Section 92 of the Civil Procedure Code (CPC).

The purpose of the Section is to protect the public trust of a charitable and religious nature from harassment by suits. Action under the section is possible only when there is allegation of breach of trust where a case is brought out for a direction from the court.

Indian Trust Act is not applicable to public or private charitable religious trust or endowments.

A suit under Section 92 of the CPC should include one or more grounds listed in the section such as removing a trustee, vesting any property in a trustee, directing inquiries etc and the suit must be in a representative character.

The prayers under section 92 of the CPC should not be for taking away the right of ordinary administration from trustees or mangers of public trust. Leave of the court under Order 1 Rule 8 is a condition precedent for instituting a suit under the section.

Additional reading

  1. The Indian Trust Act, 1882
  2. The Charitable and Religious Trust Act, 1920
  3. Religious Endowments Act, 1863,
  4. Charitable Endowments Act, 1890,
  5. Societies Registration Act, 1860,
  6. Bombay Public trust Act, 1950
  7. The income Tax Act, 1961
  8. A model private trust deed
  9. A model public trust deed for alternate medicine