I want to create a private trust for my two minor granddaughters and deposit an amount in a bank. The interest from this is to be used for their education and marriage expenses. Their parents and I plan to be the trustees. What are the tax liabilities to consider?
M Palaniswamy
The provisions of the Income-Tax Act do not prescribe for any conditions or restrictions on the appointment of trustees. Thus, you and the parents of two minor grand-daughters can be appointed as the trustees. In order to comment on the taxability of the trust, it is important to understand whether the transfer of assets to the trust is made as a revocable or irrevocable transfer. Under revocable transfer, any income arising out of such assets would be taxable in the hands of the transferor (that is, in your hands in the present case). In the case of irrevocable transfer, the trustees are assessed as representative assessee in respect of the income received by the trust and the tax liability on the income would be deposited by the trustees in the capacity of representative assessee under the PAN obtained in the name of trust.
The applicable tax rate on the income of the trust depends on the nature of income accruing to the trust, nature of the trust (specific trust or discretionary trusts), beneficiaries involved, other incomes of the beneficiaries etc. Based on the limited facts available, assuming no other income arises to the trust and share of each grand-daughter is specifically defined in the trust deed, tax liability shall be computed according to the the slab rates applicable to an individual. The trust may submit the Form 15G for non-deduction of tax at source if the tax on the total estimated income of the previous year in which such income is to be included shall be nil.
I retired as an executive from a PSU and I am continuing on contract for a monthly honorarium. What are the tax liabilities on the honorarium ?
M Yusuf
The term ‘honorarium’ has not been defined under the provisions of the Income-tax Act. ‘Honorarium payments’ are not exempt from income tax. It is only the nature of the payment which needs to be looked into to decide whether the same should be taxed as salary or fee for professional services.
You are receiving the honorarium under a contract with a PSU. It is to be seen whether the services are rendered in the capacity of an employee or as a professional. If it can be inferred that the employer-employee relationship exists, then the payments shall be taxable as ‘salary’ and liable for tax deduction at source.
If the services are rendered in professional capacity, it would be taxed as ‘income from professional services’ and liable for TDS as per provisions relating to professional services. The income will accordingly be reflected in your tax return for computing taxable income. Benefit of the applicable slab rates shall be available for taxation of such income in your hands.
The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in