Private Wealth 2021 India Law & Practice Shreya Rao AZB & Partners practiceguides.chambers.com - World Law Group
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Definitive global law guides offering comparative analysis from top-ranked lawyers Private Wealth 2021 India Law & Practice Shreya Rao AZB & Partners practiceguides.chambers.com
INDIA
Law and Practice
Contributed by:
Shreya Rao
AZB & Partners see p.20
CONTENTS
1. Tax p.3 6. Roles and Responsibilities of
1.1 Tax Regimes p.3 Fiduciaries p.13
1.2 Stability of the Estate and Transfer Tax Laws p.4 6.1 Prevalence of Corporate Fiduciaries p.13
1.3 Transparency and Increased Global Reporting p.6 6.2 Fiduciary Liabilities p.13
6.3 Fiduciary Regulation p.14
2. Succession p.6
6.4 Fiduciary Investment p.14
2.1 Cultural Considerations in Succession Planning p.6
2.2 International Planning p.7 7. Citizenship and Residency p.14
2.3 Forced Heirship Laws p.7 7.1 Requirements for Domicile, Residency and
Citizenship p.14
2.4 Marital Property p.8
7.2 Expeditious Citizenship p.15
2.5 Transfer of Property p.9
2.6 Transfer of Assets: Vehicle and Planning 8. Planning for Minors, Adults with
Mechanisms p.9 Disabilities and Elders p.15
2.7 Transfer of Assets: Digital Assets p.9 8.1 Special Planning Mechanisms p.15
8.2 Appointment of a Guardian p.16
3. Trusts, Foundations and Similar Entities p.10
8.3 Elder Law p.16
3.1 Types of Trusts, Foundations or Similar Entities p.10
3.2 Recognition of Trusts p.11 9. Planning for Non-traditional Families p.17
3.3 Tax Considerations: Fiduciary or Beneficiary 9.1 Children p.17
Designation p.11 9.2 Same-Sex Marriage p.18
3.4 Exercising Control over Irrevocable Planning
Vehicles p.11 10. Charitable Planning p.18
10.1 Charitable Giving p.18
4. Family Business Planning p.11
10.2 Common Charitable Structures p.18
4.1 Asset Protection p.11
4.2 Succession Planning p.12
4.3 Transfer of Partial Interest p.12
5. Wealth Disputes p.12
5.1 Trends Driving Disputes p.12
5.2 Mechanism for Compensation p.12
2INDIA Law and Practice
Contributed by: Shreya Rao, AZB & Partners
1 . TA X Capital gains are not subject to ordinary/pro-
gressive slab rates of income tax. Capital gains
1.1 Tax Regimes tax is levied at a flat rate that varies from 0% to
India does not currently have estate/inheritance 40%, depending on the residence and type of
tax. Therefore, it is the Indian income tax regime taxpayer, the type of capital asset and the hold-
that is most frequently relevant to the concerns ing period of the asset. Gift taxes are levied at
of individual clients and the estates, trusts or ordinary rates under the residuary income cat-
entities they set up. egory to property received at no consideration or
at a consideration that is lower than fair market
Income tax in India is levied by the central value. Gifts from specified relatives are exempt,
Income Tax Act, 1961 (ITA) and follows a sched- as are trusts created for the benefit of specified
uler approach to the taxation of income. The five relatives. Inheritances are also exempt.
categories of income are:
Income from real property is taxed at the appli-
• income from salaries; cable slab rates of an individual under the cat-
• income from house property; egory “income from house property”. This tax
• business income; is applicable to individuals regardless of their
• capital gains; and residency status in India.
• other income.
Estate Duty and Wealth Tax
The most commonly applicable transfer taxes At present, India does not have any inheritance
are the capital gains tax and an income tax on tax, estate duty or wealth tax, although there is
gifts between non-relatives (see Income Tax talk of introducing such.
Planning for Private Clients, below).
International Tax Provisions
The maximum marginal tax rate applicable to the Under the ITA, Indian residents (including indi-
“total income” of individuals is 30%. Individu- viduals, companies, partnership firms and other
als may be subject to a surcharge ranging from entities) are taxed on their worldwide income,
10% to 37%, which would result in an effective whereas non-residents are taxed only on Indian-
maximum rate of 42.74% in the highest band. All sourced income.
taxpayers, including individuals, are subject to a
“cess” (tax/levy) of 4% over tax and surcharge. The residence of individuals is determined on
the basis of a day-count test of physical pres-
The tax rate currently applicable to corpora- ence in a given financial year and/or over a
tions is 25% to 30% for Indian corporations, specified number of previous years. The resi-
depending on their turnover, and 40% for for- dence of entities depends on the nature of the
eign corporations. Lower rates may be available entity. Companies are considered resident if
for certain kinds of corporations. Corporations they are incorporated in India or have a place
are also subject to a surcharge of 2% to 12%, of effective management in India. Partnerships
depending on their residency and other turnover. are considered resident if they are organised in
Non-corporate entities such as partnerships are India or have a fraction of control and manage-
taxable based on their individual composition ment in India. The residency rule for trusts is not
and circumstances. specified in the ITA. As trusts do not have legal
personality and are otherwise taxable under the
3Law and Practice INDIA
Contributed by: Shreya Rao, AZB & Partners
representative assessee provisions, an offshore such as Indian exchange controls and asset pro-
trust could have Indian residency exposure in tection benefits. A non-resident is not permitted
one of the following circumstances: to purchase or receive a gift of real estate com-
prising agricultural land, a farm house or plan-
• if any fraction of the control and management tation property under Indian exchange control
of the trust is in India (eg, if one member of regulations.
the board of trustees is resident in India); or
• if all the beneficiaries of a discretionary trust Similarly, Indian capital gains tax applies at dif-
are resident in India. ferential rates depending upon the nature of the
asset, the holding period of the asset and, in
Hybrid entities would first need to be classified some situations, the method of transfer (such as
as corporations/partnerships or as an entity rec- a sale of listed securities on/off the exchange).
ognised in India before their Indian residency
status may be determined. 1.2 Stability of the Estate and Transfer
Tax Laws
India has a vast network of tax treaties. If tax In general, private clients in India are prepared for
treaty benefits are available, the domestic ITA tax uncertainty, which could derive from periodic
shall only be applicable to the extent that it is domestic amendments to the ITA, a recent slew
more beneficial. Therefore, it is vital to evalu- of amendments to the international tax regime
ate the impact of any relevant tax treaty on a or discussions around the potential introduction
structure. India has been an active participant in of an estate tax. Their approach regarding this
base erosion and profit shifting (BEPS) discus- state of flux is to plan on the basis of existing
sions and is a signatory to the multilateral instru- provisions, while ensuring they keep themselves
ment (MLI), which was ratified on 12 June 2019. updated regarding future tax changes.
A total of 93 notified treaties are “covered tax
agreements” modified by the MLI, which would On the domestic front, the ITA is substantially
also be relevant to evaluate while planning. amended on an annual basis, so it is important
to keep up to date on any changes. The Indian
Income Tax Planning for Private Clients international tax regime is also in a state of peri-
In the absence of an inheritance tax or wealth odic updating due to global developments such
tax in India, income tax is a key consideration as BEPS, a worldwide movement towards infor-
for private clients and their succession plans. mation exchange and tax transparency, and a
For example, no income tax is levied on inherit- growing emphasis in India on tax substance to
ance. However, gifts and trusts can be subject allow treaty benefits. Periodic amendments have
to income tax, depending on the beneficiaries been introduced over the last few years to reflect
and how the bequeathals are structured. A gift BEPS proposals. Furthermore, India ratified the
or trust in favour of a “non-relative” could result MLI and has notified treaties with 93 countries
in a tax on the recipient at ordinary rates. Gifts, to be “covered tax agreements” modified by the
trusts and bequeathals will also result in varying MLI.
stamp duty and registration cost considerations.
Therefore, the choice of whether to bequeath A third kind of uncertainty relates to the pos-
assets through a will, lifetime gift or trust usually sible introduction of an estate tax or inheritance
involves a trade-off between relevant income tax tax in India. As mentioned in 1.1 Tax Regimes,
consequences versus non-tax consequences, India does not currently have any form of death
4INDIA Law and Practice
Contributed by: Shreya Rao, AZB & Partners
tax. Estate duty was previously in force from employers/any other persons on the death of
1953 to 1985, but it was abolished as it did not such person on account of COVID-19. Neces-
meet the twin objectives for which it was intro- sary legislative amendments to the above are
duced – namely, to reduce unequal distribution expected to be made shortly.
of wealth and assist Indian states in financing
their development schemes. In addition, the cost Procedural tax amendments
of administering the estate duty was found to be Significant amendments have been made in rela-
high. There have been talks about the reintro- tion to the limitation period during which assess-
duction of estate duty for a few years now, but ments may be reopened. This period has been
it is uncertain when it will be introduced, if at reduced to three years from the relevant assess-
all. This uncertainty has not prevented families ment year, after which reassessment may only
from planning for the potential introduction of a be done in limited circumstances. Several other
duty – eg, several families and high net worth significant procedural changes have also been
individuals have set up trusts in India over the introduced in response to COVID-19, including
last few years in expectation of the introduction an extension of timelines for filing tax returns, an
of estate tax. extension of timelines for providing tax deduc-
tion certificates and a reduction of interest due.
Income Tax Changes and Key Responses to
COVID-19 Meaning of “liable to tax”
Indian income tax law is amended on an annual The Finance Act, 2021 has also clarified and
basis. Some key recent amendments brought expanded upon the meaning of the term “liable
about by the Finance Act, 2021 and the tax to tax” in the context of the definition of “resi-
authorities are summarised below. dent” in India’s double tax treaties. It also clari-
fied that the term should be interpreted with
Change in tax residency rules reference to “a country” to avoid any potential
In 2020, reliefs were introduced for financial misinterpretation.
year 2019-20 to address the risk that some
individuals may become Indian tax-resident on Tax treatment on reconstitution of
account of COVID-19-related travel restrictions. partnerships
For financial year 2020-21, Indian tax authorities Amendments have been introduced in relation to
have clarified that if an individual was dual tax- the reconstitution of partnerships, which render
resident due to the pandemic but unable to claim partners and firms liable to tax upon the retire-
tax treaty relief, he or she could approach the ment of a partner from the partnership.
Indian tax authorities for relief on a discretion-
ary basis. The above disregard does not apply Other Legal Developments
for the purposes of determining corporate tax Amendments to the Foreign Contribution
residence. Regulation Act
Significant amendments have been introduced
Tax exemptions relating to COVID-19 relief in relation to the manner in which Indian chari-
The Indian government has recently announced table entities can receive foreign contributions
tax exemptions and benefits for individuals (from foreign donors). For example, entities that
receiving financial help for COVID-19-related receive foreign contributions are no longer per-
medical treatment expenses and ex-gratia mitted to transfer such contributions to other
payments to family members of a person from non-profit entities, and are required to use the
5Law and Practice INDIA
Contributed by: Shreya Rao, AZB & Partners
foreign contributions themselves. Changes have Taxation of employee stock ownership plans
also been introduced that reduce the permitted exercised by non-residents
cap for administrative expenses, and require In Unnikrishnan VS v ITO, the Mumbai ITAT held
new applicants to open an FCRA account with a that the exercise of employee stock ownership
stipulated bank. New identification requirements plans (ESOPs) is subject to tax in India if granted
have also been introduced for persons making to a resident as consideration for services ren-
applications under the legislation. dered in India even if the ESOPs were exercised
while the holder was a non-resident.
Restriction on foreign investment
Prior government approval is now required for 1.3 Transparency and Increased Global
any foreign investment in an Indian company, if Reporting
the acquirer or beneficial owner of such invest- Tax Abuse
ment is based out of a country that shares land Tackling actual/perceived tax abuse is a strong
borders with India (which would include China), priority for the Indian government, which has
including in relation to subsequent transfers of taken several measures to this end in the recent
such investments. past, through the introduction of specific anti-
avoidance rules and a general anti-avoidance
Securities Law rule, as well as several procedural changes to
The securities regulator, the Securities Exchange the manner in which information is collected and
Board of India, released a consultation paper in processed.
February 2021 to introduce a regime for sophis-
ticated investors (Accredited Investors/AIs) Information Disclosure and Collection
in India’s securities market. AIs would benefit Non-residents who were residents of India when
from light touch regulation, exclusive access to a given foreign asset was acquired now fall
certain financial products and lower thresholds under the purview of the Black Money (Undis-
for minimum investible funds. Eligible AIs are closed Foreign Income and Assets) and Impo-
proposed to include individuals, family trusts, sition of Tax Act, 2015. Previously, only broad
non-family trusts and corporate bodies, whether disclosures by Indian residents in relation to
resident in India or not, if they meet the respec- foreign income and assets were required. India
tive thresholds for net worth, annual income or has also expanded its Tax Information Exchange
assets under management. Agreement network in the last few years, and
has begun to implement BEPS recommenda-
Resident beneficiary of an offshore tions on country-by-country reporting.
discretionary trust
In Yashovardhan Birla v DCW, the Mumbai
Income Tax Appellate Tribunal (ITAT) held that if 2. SUCCESSION
a resident beneficiary of an offshore discretion-
ary trust settled by a non-resident has the power 2.1 Cultural Considerations in
to change trustees, such beneficiary could not Succession Planning
be considered to own the trust’s assets. India ranks third in the world (after China and
the USA) in the list of countries with the highest
number of family-owned businesses, the major-
ity of which are in their third generation. Joint
family structures are widely prevalent. However,
6INDIA Law and Practice
Contributed by: Shreya Rao, AZB & Partners
the younger generation is more likely to be for- account transactions are freely permitted unless
eign-educated with different value systems, may they are specifically prohibited. Specific regula-
want to set up a nuclear family, etc. Women are tions are applicable to different forms of cross-
increasingly prominent and play a critical role in border transactions, such as transfers of shares
succession plans, more so in South India and between Indian residents and non-residents,
cosmopolitan cities. At the same time, patriarchs transfers of Indian properties to non-residents,
are often reluctant to cede control, particularly inflow and outflow of foreign exchange from
to persons other than their son. These are some India, etc. This means that most cross-border
of the broad cultural factors that influence suc- wealth transfers from private clients in the form of
cession planning in India. Having said this, it is lifetime gifts, testamentary or intestate bequests
important to keep in mind that India is a large or settlement of trusts are required to be evalu-
and diverse country, where stark differences ated for compliance with exchange controls.
exist from region to region. While inheritance by individuals is permitted
and relatively straightforward, planning through
The framework of personal laws in India also has any form of intermediary entity such as a trust
a deep cultural component. Testamentary suc- or foundation (eg, where Indian-resident parents
cession for Hindus, Buddhists, Jains and Sikhs give to an offshore trust) can create challenges.
is governed by both the Hindu Succession Act,
1956 (HSA) and certain provisions of the Indian Offshore Entities
Succession Act, 1925 (ISA), while testamentary Issues may also arise in relation to the charac-
succession for Muslims is governed by custom- terisation of offshore entities. For example, India
ary personal law. Both intestate and testamen- does not have the concept of foundations. A dis-
tary succession for Christians, Jews and Parsis cretionary private foundation may therefore be
is governed by the ISA. To the extent that these classified as a corporation (having separate legal
laws are not civil/secular laws, they are based personality) or a trust (on account of the discre-
on the customary law applicable to the relevant tionary beneficiary structure). If a non-resident
community. Indian were to set up a private foundation and
subsequently relocate to India or appoint a foun-
2.2 International Planning dation board in India, this could create ques-
With the Indian diaspora being prominent in dif- tions in India regarding the residence status of
ferent parts of the world, and with emigrants the offshore foundation. If it is classified as a
continuing to maintain strong emotional links trust with “trustees” in India, it would potentially
with India, cross-border succession planning expose the entire income of the foundation to
is common and a vital area for any private cli- tax in India.
ent adviser. At the same time, Indian tax laws,
exchange control restrictions and a web of per- 2.3 Forced Heirship Laws
sonal laws make such planning complex. India does not have any forced heirship laws
applicable to Hindus (including Buddhists, Jains
Exchange Control and Sikhs), Christians or Parsis; such persons
The exchange control regime is one of the most may freely bequeath their property as they deem
important factors in influencing the structure of fit. Hindus are subject to a form of forced heir-
a succession plan. The general rule is that capi- ship on ancestral property and any property vol-
tal account transactions are prohibited unless untarily added to the joint family pool.
they are specifically permitted, whereas current
7Law and Practice INDIA
Contributed by: Shreya Rao, AZB & Partners
Forced heirship laws are applicable to Muslims • agreements mandating conditions for the
and also to persons resident in the Indian state separation of the couple if this is considered
of Goa (irrespective of their religion). A Muslim to induce the parties not to perform their
cannot by will dispose of more than one third of marital obligations;
the surplus of their estate unless the consent of • agreements affecting parental authority in
the legal heirs is obtained. Goan residents are relation to minor children (eg, an agree-
subject to community property rules and some ment to block the rights of minor children to
forms of forced heirship. maintenance or an agreement by the father
to entirely give up custody and control of his
2.4 Marital Property child unless it is part of a separation agree-
For the most part, India follows the separate ment);
property regime, whereby each spouse leaves • agreements where a parent agrees to give a
the marriage with the property to which he or she minor in marriage for a fee; and
holds a title. The only exception to this rule is in • agreements to make payments in the nature
the state of Goa, which imposes a form of com- of a dowry – this is opposed to public policy
munity property rules. Spouses may enter into and is also now void and punishable under
prenuptial agreements contrary to this general the Dowry Prohibition Act, 1961.
custombut such agreements have to be regis-
tered (and notarised by special notaries as per As a general note, certain personal laws con-
the Goa Succession Act) in order to have bind- sider a marriage to be a sacramental union and
ing effect. not merely a contract. This has influenced courts
in their opinion on whether the rights and duties
Other religions recognise maintenance obliga- of married parties may be varied by contract. For
tions towards wives. For example, Hindu law example, in the case of a marriage under Hin-
recognises the concept of stridhan as property du law, the courts have taken the position that
belonging to a female Hindu of which she is since a marriage is not just a contract but also a
the absolute owner. Muslim law recognises the sacrament, the rights and duties of married par-
concept of mahr, which is a sum of money or ties may not be varied by their agreement and
property that a wife is entitled to receive from are governed by Hindu law (AE Thirumal Naidu
her husband in consideration of the marriage. v Rajammal, AIR 1968 Mad 201). The position
regarding the validity of such agreements is
Prenuptial and Postnuptial Agreements clearer under Muslim law, which treats marriage
Prenuptial and postnuptial agreements are not as a contract and not a sacrament. Similarly,
expressly recognised in India. However, they Goan law specifically provides for the registra-
may be enforceable, like any other contract, if tion and notarisation of prenuptial agreements
they satisfy essential requirements under the (as discussed above).
Indian Contract Act (such as the consent of both
parties, lawful object, lawful consideration, etc) Even in situations where agreements are held to
and if they are not contrary to public policy or be unenforceable, their contents may be taken
any proven custom or personal law. The follow- into consideration by the court in certain cases
ing kinds of agreements have been held not to as a guiding factor to determine the intent of
be enforceable: the parties.
8INDIA Law and Practice
Contributed by: Shreya Rao, AZB & Partners
2.5 Transfer of Property Family Settlement Agreements
The acquisition of property by way of a gift Family settlement agreements are frequently put
from relatives or by inheritance does not have together in dispute situations and are consid-
any effect on the cost basis of the property, as ered to be tax-neutral, subject to the satisfac-
these transfers are exempt from income tax and tion of certain conditions in the ITA, including
capital gains tax. Therefore, the cost basis of the that the transfer should take place between indi-
transferor carries over to the recipient of the gift/ vidual participants to the agreement. It is also
inheritance. possible to transfer assets through lifetime gifts
without any income tax consequences, provided
2.6 Transfer of Assets: Vehicle and that the donor and donee are “relatives” as per
Planning Mechanisms the statutory definition in the ITA. Stamp duty
There are a limited number of wealth planning may be applicable depending on the applicable
vehicles in India. Depending on the person’s state legislation.
specific requirements or planning objectives,
the most commonly utilised options to transfer 2.7 Transfer of Assets: Digital Assets
assets are: India does not have specific legislation gov-
erning the disposition (both testamentary and
• a will; intestate) of digital assets. The Information
• a private trust; or Technology Act, 2000 applies to all digital infor-
• a family settlement agreement (or a combina- mation and assets, but does not address suc-
tion thereof). cession. Therefore, such assets (including email
accounts, digital photographs, cryptocurrency,
Wills etc) would be classified as “movable property”
A will tends to be the most cost-effective option under the General Clauses Act and subject to
as there would be no inheritance tax or stamp the rules applicable to other kinds of movables.
duty. On the flip side, a will would offer no asset This means that they may be bequeathed under
protection against future creditor claims or a will or transfer under the principles of intestate
future inheritance tax (in the event inheritance succession.
tax is reintroduced in India) and would entail a
time-consuming probate process at the time of Digital Assets in Testate and Intestate
execution. Succession
While writing wills, testators tend to focus on
Private Trusts traditional assets, and digital assets are often
A private trust (either as a standalone option or relegated to the residual provisions. If such
in combination with a family settlement) would residual provisions contemplate equal division
result in stamp duty and operational costs but amongst multiple heirs, the right to manage and
would be beneficial from an asset protection and benefit from digital assets would then be held
future inheritance tax standpoint. It is pertinent equally by all such heirs, who may not always
to note that some of these considerations (eg, agree. This has resulted in contentious situations
stamp duty costs and probate costs) differ for in India in the past over intangibles with financial
each Indian state and would need to be analysed value – notably, IP rights such as trade marks
as per the applicable state laws. and copyrights in film scripts. In the absence
of a will, the rules of intestate succession under
the relevant personal law would apply. As digital
9Law and Practice INDIA
Contributed by: Shreya Rao, AZB & Partners
assets are classified as movable property, heirs flexibility they afford and the neutral tax treat-
would need to obtain a succession certificate ment.
from the relevant court in India to obtain pos-
session, and ownership would most likely be Trusts
split. In both intestate and testate succession, Determinate trusts are treated as fiscally trans-
digital assets (including cryptocurrency) would parent entities in India and their income may be
be treated as a capital asset and there would be taxed in the hands of the beneficiaries or the
no tax at the time of inheritance. The heir would trustee. Trustees are the representative asses-
inherit the cost basis of the previous owner and sees of a trust, and their obligations depend on
be subject to capital gains tax upon the sale of the beneficiaries they represent. If the beneficiar-
the asset. ies or their shares are discretionary or if the trust
has business income, the trust is taxable at the
Legality of Virtual Currencies maximum marginal rate. If the trust is a revoca-
Regarding the legality of cryptocurrency, the ble trust, the author or settlor continues to be
Supreme Court set aside a circular issued by taxable on the income of the trust, as the transfer
the Reserve Bank of India (RBI) on virtual curren- is disregarded for tax purposes. Private trusts in
cies in Internet and Mobile Association of India India are governed by the Indian Trusts Act, 1882
v RBI (WP(C) No 528/2018). The Supreme Court (Trusts Act), whereas public trusts are governed
held that the RBI failed to establish how enti- by the relevant state legislation and common law
ties regulated by it have been adversely affected principles in the absence of specific legislation.
on account of the interface with virtual currency
exchanges. In light of this judgment, RBI’s regu- Hindu Undivided Family
lated entities were not restricted from providing Hindus may also set up a Hindu Undivided Fam-
banking-related services in relation to the pur- ily (HUF) to hold joint family property. It con-
chase/sale of virtual currencies. The Cryptocur- sists of the common ancestor and all his lineal
rency and Regulation of Official Digital Currency descendants up to any generation, together with
Bill, 2021 was proposed to be introduced in this his wife. An amendment in 2005 recognised the
year’s parliament session but it is currently fac- rights of daughters (both married and unmarried)
ing delays. The contents of the bill are not yet as coparceners being entitled to a share in the
available in the public domain. The objective of HUF property in the same manner as sons. The
the bill is to create a facilitative framework for income tax rates applicable to resident HUFs
the creation of the official digital currency to be are the same as the rates applicable to resident
issued by the RBI and to regulate private cryp- individuals (below 60 years), and distributions
tocurrencies in India. of capital assets from an HUF are not subject
to further tax.
3 . T R U S T S , F O U N D AT I O N S The increase in the settlement of Indian trusts
AND SIMILAR ENTITIES over the past few years may be attributed to two
key developments:
3.1 Types of Trusts, Foundations or
Similar Entities • firstly, an expectation that India will introduce
Foundations are not recognised in India. Trusts an estate tax in the near future; and
are recognised and are the most commonly used • secondly, the passing of the Insolvency and
entity for estate planning purposes, given the Bankruptcy Code in 2016, which compelled
10INDIA Law and Practice
Contributed by: Shreya Rao, AZB & Partners
business families to prioritise the ring-fencing The Trusts Act does not place any restrictions
of personal assets. on a beneficiary/donor also serving as a trustee.
Briefly, a person can play any two of the three
In contrast, the expanded gift tax regime in Sec- roles involved in a trust (ie, the roles of settlor,
tion 56(2)(x) of the ITA has negatively impacted trustee or beneficiary).
the settlement of trusts in India, particularly
where the intended beneficiaries of such trusts If a settlor also acts as a trustee, it is possible
are non-relatives such as philanthropic organisa- that the trust may be regarded as a revocable
tions or friends. trust under the ITA. In such a case, the settle-
ment of the trust would be disregarded for tax
3.2 Recognition of Trusts purposes, and the income of the trust may be
Trusts are recognised and well understood in treated as belonging to the settlor.
India. Private trusts may be set up either during
a person’s lifetime or under a will (ie, a testamen- 3.4 Exercising Control over Irrevocable
tary trust). For tax purposes, trusts do not have Planning Vehicles
separate legal personality and are taxed in the Indian trust law is still at a nascent stage and is
hands of either the trustee or the beneficiaries. yet to introduce provisions specifically relating
Further information on the types of trusts in India to settlor reserved powers. In practice, Indian
and their tax treatment is provided in 3.1 Types trust deeds do feature such provisions, but their
of Trusts, Foundations or Similar Entities. validity is yet to be tested by the courts.
3.3 Tax Considerations: Fiduciary or
Beneficiary Designation 4 . F A M I LY B U S I N E S S
The Trusts Act does not restrict the appointment P L A N N I N G
of Indian citizens or residents as trustees or ben-
eficiaries of a foreign trust and vice versa. How- 4.1 Asset Protection
ever, there is a possibility that a foreign trust that An irrevocable discretionary private trust is likely
has an Indian resident as a trustee may be taxed to be the most beneficial from an asset protec-
in India on the basis that a part of its control and tion and (future) inheritance tax standpoint.
management is in India. Tax consequences may However, its settlement results in stamp duty
also arise in India if an offshore discretionary and operational costs. Furthermore, the settle-
trust has all its beneficiaries resident in India, or ment of a trust is not valid if it is fraudulent – eg,
if an offshore determinate trust has the relevant if it was undertaken to defeat an existing liability.
determinate beneficiaries resident in India. An
Indian tax resident who is a settlor, trustee or Claw-backs
beneficiary of a foreign trust is required to make There may also be claw-backs under specific
various disclosures in his/her income tax returns laws. For example, the income tax department
on an annual basis regarding the details of the also has the ability to render any transfer of
foreign trust or entity, its taxable income/assets assets void if it is by a taxpayer who has notice
and any beneficial interest. Broad disclosures of pending litigation/tax proceedings, unless
under the Black Money (Undisclosed Foreign such transfer is made in good faith at fair value.
Income and Assets) and Imposition of Tax Act, This provision could potentially be used to void
2015 are also required to be made by Indian resi- the settlement of a trust if there are existing tax
dents on foreign income and assets. liabilities. Furthermore, the Insolvency and Bank-
11Law and Practice INDIA
Contributed by: Shreya Rao, AZB & Partners
ruptcy Code, 2016 (IBC) is a creditor-friendly law 4.3 Transfer of Partial Interest
that provides for a two-year look-back period There are few crystallised valuation norms appli-
within which “undervalued transactions” may be cable to such transfers, particularly since there
clawed back, if they are entered into between is no estate tax in India. Lifetime gifts between
a bankrupt person and their “associate”. This, relatives are also generally exempt, as a conse-
inter alia, includes a trustee of a trust in which quence of which such transfers of partial interest
the beneficiaries of the trust include the debtor. are often not taxable. Having said this, it would
be standard practice for an accountant to fac-
4.2 Succession Planning tor lack of marketability into the valuation of any
Trusts are a common vehicle for family business asset.
succession, and are typically used alongside a
softer document such as a family constitution,
which serves as a guideline for the board of 5 . W E A LT H D I S P U T E S
trustees. In the absence of a trust, families may
set up bodies such as a family board or family 5.1 Trends Driving Disputes
council to take collective decisions in relation Based on statistics for the period 2012 to 2017,
to the family business. Such boards also act as disputes relating to the recovery of money con-
a training ground for the younger members of stitute 30.2% of disputes in India, followed by
the family and may also be guided by a family land and property disputes (29.3%) and family
constitution or a vision document. disputes (13.5%). In addition, about 80% of land
and property disputes in India relate to owner-
The settlement of trusts in favour of relatives, ship or inheritance disputes. A substantial num-
or bequeathal through a will, is currently not ber of family disputes are referred to mediation
subject to income tax in India. Therefore, these and other forms of alternate dispute resolution.
business succession strategies do not involve a
material income tax component unless an inter- High-value family disputes amongst high net
nal corporate restructuring of the group hold- worth individuals and ultra high net worth fami-
ing is required. Such restructuring is frequently lies are particularly likely to be settled through a
required at the point of creating the succession non-public means such as mediation. Trust dis-
plan, to rationalise the family holding structure putes (ie, disputes between trustees and ben-
as well as render the succession plan enforce- eficiaries) are not currently arbitrable, even if the
able. Such restructuring requires a close analysis trust deed contains an arbitration provision. If
of tax consequences. For example, if the family such disputes are expected, it is recommended
business is held in the form of listed securities, that trustees and beneficiaries sign a specific
which the family wishes to settle into a business arbitration agreement.
succession trust, an exemption would likely be
sought from the securities regulator under the 5.2 Mechanism for Compensation
Takeover Code. Similarly, if the family hold- Family and wealth disputes in India may be
ing consists of valuable real estate, the stamp resolved by approaching a Civil Court or Fam-
duty consequences of setting up a succession ily Court (depending on the nature of the suit).
structure such as a trust are often significant and Civil Courts have jurisdiction over suits relat-
require planning. ing to property, certain family matters such as
the appointment of guardians, and the admin-
istration of trusts. Family Courts typically have
12INDIA Law and Practice
Contributed by: Shreya Rao, AZB & Partners
jurisdiction over matrimonial matters such as thermore, Indian trust law does not differentiate
suits for declaration of the validity of marriage between the standard of care to be exercised by
or spousal status, suits regarding property of a corporate trustee versus an individual trustee.
spouses (joint or individual), suits for injunctions
arising out of a marital relationship, etc. 6.2 Fiduciary Liabilities
Trustees may only be held personally liable for
The nature of relief provided by the Civil Court or a breach of their duties under the Trusts Act.
Family Court would depend on the nature of the This would include liability for any improper
suit. For example, a suit in a marital dispute may act, neglect, default or omission by a trustee in
result in payments for the maintenance of wife respect of either the trust property or the ben-
and children, where the “compensation” would eficiary’s interest in such property. Outside a
be determined very differently from a property breach of trust, under Indian trust law it is not
dispute before the Civil Court. The following possible to “pierce the veil” of a trust to hold
standard principles, among others, are applica- trustees personally responsible for the liabilities
ble to the assessment of damages: of the trust. Having said this, see 4.1 Asset Pro-
tection regarding look-backs/claw-backs under
• Indian courts tend to award damages on an specific laws such as the IBC. It should be noted
actual basis – consequential and exemplary that there are no Indian precedents on the valid-
damages are rare; and ity of a private trustee company.
• prior to the enactment of the Specific Relief
(Amendment) Act, 2018, Indian law featured The Trusts Act
a preference for damages over specific The Trusts Act is a basic piece of legislation
performance pursuant to a breach of con- dating back to 1882, and there has been lim-
tract. However, the Specific Relief (Amend- ited case law on newer trust structures in India.
ment) Act, 2018 modified this position and Therefore, while most institutional trustees/fidu-
increased the incidence of specific relief by ciaries do include detailed provisions regarding
requiring courts to enforce the specific per- exculpation and delegation in their trust deeds,
formance of a contract as a rule, subject to the validity of such exculpatory provisions, del-
limited exceptions. egation of authority, settlor reserved powers,
etc, is not always certain.
6. ROLES AND The Trusts Act states that trustees are not per-
RESPONSIBILITIES OF mitted to delegate their duties to either a co-
FIDUCIARIES trustee or any third party, unless:
6.1 Prevalence of Corporate Fiduciaries • doing so is permitted by the trust instrument;
Corporate or institutional trustees are increas- • the delegation is in the regular course of busi-
ingly appointed by settlors who seek independ- ness; or
ence and continuity in the management of the • doing so is otherwise considered necessary.
trust. Although they are recognised by Indian
case law, there is some uncertainty regarding the Trustees may also delegate their duties with the
validity of institutional trustee structures where consent of the beneficiaries, provided such ben-
the family continues to exercise a role through eficiaries are competent to contract. However,
protectorship/settlor reserved powers, etc. Fur-
13Law and Practice INDIA
Contributed by: Shreya Rao, AZB & Partners
there is insufficient clarity regarding the alloca- Bartlett provisions, but their validity is yet to be
tion of liabilities where there is such a delegation. established by Indian courts.
Exculpatory provisions would be evaluated
based on the general duties of trustees under 7. CITIZENSHIP AND
the Trusts Act, one of which is the duty to make RESIDENCY
good the loss sustained by the trust property or
beneficiary on account of the breach. Based on 7.1 Requirements for Domicile,
existing jurisprudence, such clauses should be Residency and Citizenship
considered to be valid to the extent that they do The requirements to establish domicile and resi-
not exonerate trustees from more serious forms dency vary depending on the law in question.
of breach (such as gross negligence and wilful Residency for individuals is typically established
default). based on the period of physical stay, whereas
domicile also evaluates the “intention” of said
6.3 Fiduciary Regulation person in being physically present in India.
The general standard applied to fiduciaries is
that they can make investments as an ordinary Domicile
prudent person. In addition, Section 20 of the Under Indian private international law principles,
Trusts Act prescribes a list of permitted invest- questions of inheritance, status and marriage are
ments, which the trustees may only depart from determined by a person’s domicile. Immovable
if specifically authorised by the trust deed. It is property is bequeathed based on its situs. Most
pertinent to note that the categories of invest- Indian personal laws are applicable only if at
ments prescribed by the Trusts Act are restrict- least one of the persons involved is domiciled in
ed only to private trusts and do not restrict the India. Indian exchange control laws also make
modes of investment permissible in the case of reference to the domicile of the individual.
charitable trusts, although such trusts may be
regulated by state-specific statutes. Domicile generally attaches to a person at birth,
and is changed by a conscious act of such per-
6.4 Fiduciary Investment son. It may therefore be classified into two types
The modern portfolio theory is not commonly – ie, domicile by origin and domicile by choice.
applied in India – the existing investment stand- The domicile of origin of a legitimate child is
ard applicable to trustees is much narrower and the country in which the father was domiciled
restricts trustees to the instruments specified at the time of the child’s birth. The domicile of
in Section 20 of the Trusts Act. Most trusts get origin of an illegitimate child is the country in
around this requirement by specifically allocating which the mother was domiciled at the time of
powers to trustees under their deeds. the child’s birth. A person may surrender their
domicile of origin by taking up fixed habitation in
The Trusts Act does not place any restrictions on another place and demonstrating their intention
trusts holding active businesses. Trusts that run to stay there – this is referred to as a “domicile of
such businesses are taxable as business trusts, choice”. A minor cannot independently acquire
at the maximum marginal rate. Sometimes a domicile of choice until they reach the age of
this creates issues when business succession majority. If a non-Indian domiciled person wishes
trusts are set up with institutional trustees. The to take on domicile in India, they are required
trust deeds of such trusts typically include anti-
14INDIA Law and Practice
Contributed by: Shreya Rao, AZB & Partners
to file a declaration before a designated officer 7.2 Expeditious Citizenship
after being resident in India for at least one year. In 2016, the Indian government introduced a
scheme to grant Permanent Residency Status
Residence (PRS) for ten years (with a multiple-entry option)
India has separate laws to determine residence to foreign investors bringing in a minimum
for tax and exchange control/regulatory purpos- investment of INR100 million within 18 months
es. See 1.2 Stability of the Estate and Trans- or INR250 million within 36 months. The invest-
fer Tax Laws for information regarding the resi- ment must also generate employment for at least
dence test under tax law. 20 resident Indians every year. The spouses and
children of such eligible foreign investors would
Under exchange control provisions, the resi- also be granted PRS. If a holder of PRS wishes
dence test is contained in the Foreign Exchange to apply for citizenship, they would need to make
Management Act, 1999 (FEMA), which states a separate application and follow the prescribed
that a “person resident in India” includes an indi- process.
vidual residing in India for more than 182 days
during the course of the preceding financial year,
unless: 8. PLANNING FOR
M I N O R S , A D U LT S W I T H
• such person is in India for an uncertain period DISABILITIES AND ELDERS
– ie, without requisite intention; or
• such person has gone out of India in such cir- 8.1 Special Planning Mechanisms
cumstances as would indicate their intention Private Trusts
to stay outside India for an uncertain period. While India does not have a special needs
trust regime, it is increasingly common to use
FEMA also applies differential rules to non-res- private trusts to provide for beneficiaries with
idents who have Indian citizenship, or who are disabilities. Since living wills/lasting powers of
descended from Indian citizens. attorney are unlikely to be enforceable in India,
some private clients also settle trust structures
Citizenship in advance, in anticipation and preparation for
Indian citizenship may be acquired by birth, their own disability in the future.
descent, naturalisation or registration in accord-
ance with the provisions of the Citizenship Act, Non-enforceability of Living Wills and Lasting
1955. Briefly, for persons born in India after 1950, Powers of Attorney
citizenship by birth is automatically conferred if The non-enforceability of living wills and lasting
either parent of such person is an Indian citizen. powers of attorney is a serious setback to people
who wish to plan for future contingencies with-
It is also relevant to highlight that India does out having to settle a trust. A living will typically
not permit dual citizenship – this means that if states a person’s wishes as to how their property
a minor acquires Indian citizenship by descent and affairs would be managed in the event they
but also has foreign citizenship by birth, such lose their mental capacity. A lasting power of
foreign citizenship needs to be renounced within attorney enables a person to appoint a repre-
six months of attaining the age of majority. It is sentative (or next of kin) who would be author-
also possible to apply to the central government ised to make decisions concerning healthcare,
to become a citizen by registration. property and other matters when such person
15Law and Practice INDIA
Contributed by: Shreya Rao, AZB & Partners
is incapable of making their own decisions by ever, the appointment of a guardian under the
virtue of physical or mental incapacity. Both are GWA may be done by the relevant District Court
unlikely to be enforced by Indian courts. This is or High Court.
because there is no special legislation enabling
these documents, and the Indian Contract Act, Rights of Persons with Disabilities Act
1872 provides that an agency (including a power The Rights of Persons with Disabilities Act, 2016
of attorney) would automatically be terminated empowers a court or designated authority to
in the incapacitation of the principal or agent. appoint a limited guardian to take legally binding
decisions on behalf of (and in consultation with) a
Mental Healthcare Act person with a disability. A limited guardianship is
Some relief is available under the Mental a system of joint decision-making that operates
Healthcare Act, 2017 (MHA), which provides for on mutual understanding and trust between the
advance directives in matters relating to mental guardian and the disabled person. Similarly, the
illness. Furthermore, in Common Cause v Union MHA provides for the appointment of a “nomi-
of India, the Supreme Court recently held that nated representative” for a person with mental
advance medical directives may be valid in mat- illness by the Mental Health Review Board (of
ters of grave medical illness and passive eutha- the relevant Indian state). It is pertinent to note
nasia, subject to compliance with a detailed that a nominated representative under the MHA
procedure laid down by the court. Although the is only permitted to take healthcare-related deci-
ruling makes some progress towards enabling sions and not decisions in relation to the finan-
people to plan for serious/terminal conditions, cial assets of the person with mental illness.
there are still several open questions when it
comes to the validity of advance directives for 8.3 Elder Law
lesser medical decisions and financial decisions. Retirement Planning
The decline of the joint family system in India has
8.2 Appointment of a Guardian increased the importance of retirement planning
Guardians and Wards Act among Indian senior citizens. Amongst high net
The principal legislation governing the rights and worth individuals, it is common to set up trusts
remedies of guardians and wards is the Guard- to plan for later years and ensure that funds are
ians and Wards Act, 1890 (GWA). In addition, managed in a way that ensures a basic standard
Hindus are governed by the Hindu Minority and of living for both husband and wife. Such trusts
Guardianship Act, 1956. There are primarily are particularly useful in situations of medical/
three categories of guardians: physical incapacity, since living wills/lasting
powers of attorney are not specifically recog-
• natural guardians – ie, the parent/s or hus- nised and are unlikely to be enforceable in India.
band (in the case of Hindus) or only the father
(in the case of Muslims); Senior Citizens Savings Scheme
• testamentary guardians appointed by a The Indian government also offers several pen-
father’s will; or sion schemes to enable persons to prepare for
• guardians appointed under the GWA. their retirement. Post-retirement, senior citizens
sometimes opt for the Senior Citizens Savings
The appointment of natural and testamentary Scheme, which offers regular income and quali-
guardians does not generally involve any court fies for a deduction under the ITA. They may also
proceeding, except in a contest situation. How- choose to set up a reverse mortgage scheme if
16INDIA Law and Practice
Contributed by: Shreya Rao, AZB & Partners
they own a house and need regular cash flow. Rights of Adopted Children
Senior citizens are also eligible for tax benefits, Children may be adopted under a secular law,
including differential tax slabs on their total the Juvenile Justice (Care and Protection of
income. These benefits are revised periodically. Children) Act, 2015 (JJA), or under a religious
personal law known as the Hindu Adoption and
Maintenance Act, 1956 (HAMA).
9. PLANNING FOR NON-
T R A D I T I O N A L FA M I L I E S HAMA is only applicable to adoptions by Hindus
of children born to Hindus. It confers upon the
9.1 Children adoptee the same rights and privileges in the
Rights of Illegitimate Children family of the adopter as a legitimate child. Fur-
Under Hindu intestate succession law, children thermore, an adopted child is entitled to inherit
born during the subsistence of a marriage are in the same manner and to the same extent as a
deemed to be legitimate, regardless of wheth- natural-born child, except in certain cases (eg,
er such marriage was void or voidable. This is if the child has been adopted by a disqualified
known as “deemed legitimacy” and typically heir).
applies in situations of bigamous marriages or
other forms of void/voidable marriages. Such The JJA allows adoptions by communities
illegitimate children are granted a right to inherit whose personal (religious) laws do not recog-
the property of their parents as per the Hindu nise adoption – examples being Muslim, Chris-
Marriage Act, 1955. tian and Parsi law. Prior to the introduction of the
JJA, individuals in such communities could only
The benefit of deemed legitimacy is not appli- take on guardianship responsibilities under the
cable to children born from illicit/adulterous GWA. However, this did not give adopted chil-
relationships. Furthermore, Section 16(3) of the dren the full rights (such as inheritance rights) of
Hindu Marriage Act makes it abundantly clear biological children. The JJA addresses this issue
that illegitimate children would only be entitled and children adopted under this Act are akin to
to inherit the property of their parents and no biological children.
other relatives. A similar provision also exists
in the Special Marriage Act, 1954 (SMA), which Surrogacy Arrangements
extends to children born in marriages solem- In the absence of a statute governing surrogacy
nised between persons domiciled in India (irre- in India, surrogate pregnancy arrangements are
spective of their religion or community). There- currently governed by the contract between
fore, deemed legitimacy is applicable not only to the parties and the draft Assisted Reproduc-
children born in marriages solemnised between tive Technique Clinics Guidelines. However,
Hindus but also to persons belonging to other the Union Cabinet recently approved the Sur-
communities as well, if they were married under rogacy (Regulation) Bill, 2020 (Surrogacy Bill,
the SMA. 2020) in February 2020 after incorporating the
recommendations of a select committee to the
This rule does not apply to children born in mar- erstwhile Surrogacy (Regulation) Bill, 2019 (Sur-
riages solemnised under a different personal law, rogacy Bill, 2019).
whose situation would depend on the personal
law applicable. As per the erstwhile Surrogacy Bill, 2019, Indi-
an couples would be permitted to have a child
17Law and Practice INDIA
Contributed by: Shreya Rao, AZB & Partners
through a surrogate acting on an altruistic basis 1 0 . C H A R I TA B L E
(ie, without consideration), provided that the sur- PLANNING
rogate was a “close relative” who was married
and already had a biological child of her own. 10.1 Charitable Giving
The condition requiring the surrogate to be a Charitable giving in India has tended to be driven
close relative has now been removed in the Sur- more by religious/cultural factors than by laws/
rogacy Bill, 2020 and any “willing” woman is now tax exemptions. However, entities set up with a
permitted to act as a surrogate, although com- defined “charitable purpose” can register as tax-
mercial surrogacy continues to be restricted. In exempt entities under the ITA, subject to the sat-
addition, non-Indian-origin couples, single men, isfaction of certain requirements. Contributions
partners in live-in relationships and homosexu- to such tax-exempt entities are then allowed a
als are not likely to be permitted to take advan- whole/partial tax deduction in the hands of the
tage of surrogacy arrangements as per the Sur- donor. The introduction of the Corporate Social
rogacy Bill, 2020. Responsibility (CSR) Rules, 2014, under which
certain companies are required to contribute 2%
9.2 Same-Sex Marriage of their net profits towards CSR activities, has
Same-Sex Marriage given a significant boost to the non-profit sector.
Same-sex marriages are not recognised in India.
Until very recently, homosexuality was consid- 10.2 Common Charitable Structures
ered criminal due to a relic in the Indian Penal Some Indian families choose to carry out phi-
Code, 1860 that criminalised “carnal intercourse lanthropy through their business entities under
against the order of nature”. This provision was the CSR route, whereas some choose to set up
struck down by the Supreme Court in Navtej Sin- separate charitable entities. The entities that are
gh Johar v Union of India (Writ Petition (Criminal), most commonly used for charitable planning are
No 76 of 2016) as being “irrational, indefensi- charitable/public trusts, Section 8 companies
ble and manifestly arbitrary” to the extent that and charitable societies.
it applies to consensual intercourse between
adults. Charitable Trusts
A charitable/public trust is a popular vehicle
Domestic Partners for philanthropic activities, except in specified
Domestic partners are not expressly conferred states that have public trust legislation, such
legal status in India. However, certain cases in as Maharashtra. In such states, public trusts
the recent past have recognised “live-in relation- are governed by a charity commissioner, who
ships” and conferred rights upon them in spe- typically has wide powers of control and over-
cific situations. If the partners have cohabited sight over the trust’s activities. This limits the
together for a long time, the Indian Evidence Act operational flexibility of trustees, who therefore
states that a presumption is created in favour sometimes prefer a Section 8 company. In states
of wedlock. Cases have also held that there is without public trust legislation, the trust deed
a presumption of legitimacy for children born in is simply registered under the Registration Act,
such relationships. This presumption may be 1908 and is subject to the terms specified in the
rebutted, but a heavy burden lies on the person instrument, which allows flexibility in decision-
who seeks to disprove the legitimate relation- making. However, even such public trusts (set
ship, as the law leans in favour of legitimacy. up in unregulated states) are subject to restric-
tions under the ITA if they choose to apply for
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