Family Office & Private Wealth Structuring

A private discretionary trust is taxed at the Maximum Marginal Rate — 30% plus applicable surcharge and health and education cess — under Section 164(1) of ITA 1961 for AY 2026-27 income. Where the trust deed names each beneficiary and specifies their share, Section 161 allows the trustee to be assessed at each beneficiary's individual slab rate instead, which can be significantly lower. From TY 2026-27 onwards ITA 2025 governs and the equivalent position is carried forward under Chapter XV. Drafting the beneficiary allocation clause correctly is therefore the primary tax-engineering lever in private trust structuring.

Category II AIFs — which include private equity funds, real estate funds, and debt funds that do not use leverage beyond permitted limits — are registered under Regulation 16 of the SEBI (Alternative Investment Funds) Regulations, 2012. Minimum corpus is Rs. 20 crore and minimum investment per investor is Rs. 1 crore (Rs. 25 lakh for employees and directors of the manager). Annual compliance includes filing a placement memorandum in Form A, quarterly investor reports, and compliance with SEBI Circular SEBI/HO/AFD/AFC1/P/CIR/2023/97 on valuation norms for unlisted securities.

NRI contributions to an irrevocable private trust holding Indian assets require prior RBI approval under FEMA 1999 read with the Master Direction on Acquisition and Transfer of Immovable Property in India (2018). For AIF subscriptions, NRI and OCI contributions are permitted on a repatriation basis under Schedule IV of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, provided the fund holds a valid SEBI registration. Each inward remittance must be reported — typically in Form FC-GPR for equity instruments or the relevant FEMA reporting return — within 30 days of receipt.

A PMS arrangement does not create a separate legal entity — gains flow directly to the investor and are taxed in their hands. For AY 2026-27, short-term capital gains on listed equity held under 12 months are taxed at 20% under Section 111A of ITA 1961 (post Finance Act 2024 rate), and long-term gains exceeding Rs. 1.25 lakh are taxed at 12.5% under Section 112A. Under ITA 2025 for TY 2026-27 these provisions map to Sections 67 and 68 respectively. PMS management fees are not deductible against capital gains — there is no provision under Section 48 to allow such a deduction.

Transfers by way of gift, will, or irrevocable trust settlement are excluded from the definition of transfer under Section 47(iii) of ITA 1961, so no capital gains arise at the point of transfer. When the recipient — whether a trust, heir, or HUF — subsequently sells, the cost of acquisition is the original cost to the transferor under Section 49(1), and the holding period of the transferor is included for the purpose of determining short-term or long-term status. A family settlement among co-parceners effecting partition of an HUF does not attract capital gains under Section 171. Stamp duty on the trust deed is governed by the applicable State Stamp Act and varies from 0.1% to 5% of corpus value depending on the state.