Private & Business Trust Tax Changes in 2025: What to Know

If you’ve been keeping an eye on how trusts are taxed in India, you’ll know 2025 has brought a whirlwind of changes. Whether you’re a settlor, trustee, or beneficiary, these updates are more than just legal jargon—they’re about how families protect wealth, how charities operate, and how business trusts keep their books in order. Let’s walk through what’s new, what’s tricky, and what you need to watch out for if you want to stay on the right side of the taxman.

Family Trusts: The “Relatives Only” Rule Shakes Things Up

Here’s the big headline: if you’re involved with a family discretionary trust, the rules on who counts as a beneficiary just got a lot stricter. Thanks to a major tribunal decision (yes, the Buckeye Trust case), trusts can no longer keep the door open for “just in case” beneficiaries like friends, business partners, or even cousins and nieces. The law now says only those defined as “relatives” under the Income Tax Act make the cut—and that list doesn’t include cousins, nephews, or non-blood relations.

Why does this matter? Well, if your trust deed allows for the possibility of adding a non-relative in the future, the tax authorities can swoop in and tax the entire trust’s assets right away, at the highest possible rate. That’s a sharp turn from how things worked before, where families had more flexibility to tweak their succession plans as life changed.

Dr. Anup Shah, a partner at a respected CA firm, summed it up: “The exemption under the I-T Act is only if all beneficiaries are defined relatives of the settlor.” In plain English, if you want to keep your trust tax-friendly, you need to keep the beneficiary list tight and compliant.

What Does This Mean for Discretionary Trusts?

Discretionary trusts have always been popular for their flexibility—trustees could decide who gets what and when. But now, if your trust isn’t strictly for “relatives” as per the law, you’re looking at a 30% tax rate plus surcharges and cess. That’s enough to wipe out the main tax advantages that made these trusts so appealing in the first place.

So, if you’re managing or benefiting from a discretionary trust, now’s the time to review your trust deed. If there’s any wiggle room for non-relatives, you’ll want to talk to your legal advisor pronto.

Charitable Trusts: One Exemption Scheme to Rule Them All

Charitable trusts have had their own maze of tax exemptions, mainly under Section 10(23C) and Section 11. The 2024 Budget is aiming to simplify things by merging these into a single, unified exemption framework. This is good news for charities that have struggled with confusing paperwork and compliance headaches.

What’s changing?

• Registration is getting simpler—no more choosing between different exemption routes.
• Compliance will be harmonized, so the risk of tripping up on technicalities goes down.
• Investment rules are clearer, with specific guidelines on what counts as an eligible investment.

But there’s a catch: the government is tightening the screws on how charitable funds are managed. Trusts will need to show detailed financial records, prove they’re sticking to the rules, and be ready for more scrutiny from the tax authorities. If you’re running a charity, transparency and documentation are now non-negotiable.

Business Trusts: Deadlines and Capital Gains—Don’t Blink

If you’re in the world of REITs or InvITs, there’s a new filing deadline you can’t afford to miss. The forms for reporting income distributions (Form 64A and 64E) now have to be filed by June 15, not November 30. That’s a four-month head start, and it means you’ll need to get your books closed and your auditors on speed dial much earlier than before.

There’s also a big change in how capital gains are taxed for business trusts. Thanks to the Finance Bill 2025, gains on equity shares and trust units will now be taxed at the rates specified in Section 112A, not at the maximum marginal rate. This should lighten the tax load for many trusts and make these investment structures more attractive.

The new rules kick in from April 1, 2026, so there’s some time to adjust—but don’t wait until the last minute to update your compliance processes.

Surcharge on Discretionary Trusts: A Bit of Relief

Here’s a bit of good news from the Mumbai Tax Tribunal: discretionary trusts won’t always get hit with the highest surcharge rate. Instead, the surcharge will be applied based on actual income slabs. So, if your trust’s income is under Rs. 1 crore, you won’t face the 37% surcharge that used to apply to everyone across the board. This makes discretionary trusts a little more appealing for families with moderate wealth.

Compliance: The Bar Just Got Higher

Across the board, trusts are facing more scrutiny. The Principal Commissioner of Income Tax (PCIT) now has greater authority to review and even cancel trust registrations if there are violations. Detailed financial reports, proof of beneficiary relationships, and clear investment documentation are now must-haves, not nice-to-haves. If you’re involved with a trust, meticulous record-keeping is your new best friend.

Real-World Examples: How Trust Taxation Plays Out

Let’s make this less abstract. Suppose you have a private trust where four family members each get Rs. 2.5 lakhs from a Rs. 10 lakh trust income. If each beneficiary is in a lower tax bracket, they pay less tax than if the trust itself paid at the top rate. But if the trust earns business income, the whole amount is taxed at the maximum rate, no matter what.

For discretionary trusts where the beneficiaries aren’t clearly defined, the taxman applies the maximum rate. So, flexibility comes at a price—higher taxes.

What Should You Do Now?

• If you have a family trust, review your deed. Make sure all beneficiaries fit the “relatives only” rule, or talk to your advisor about restructuring.
• Charitable trusts should get their paperwork in order and prepare for stricter oversight.
• Business trusts need to update their compliance calendars and take advantage of the new capital gains rules.
• Everyone involved with trusts should double down on documentation and transparency.

The bottom line? Trust taxation in India is evolving fast, and the cost of getting it wrong is higher than ever. But with careful planning and a willingness to adapt, families, charities, and business trusts can still make the most of these structures—just with a little less wiggle room than before