India does not currently have estate/inheritance tax. Therefore, it is the Indian income tax regime that is most frequently relevant to the concerns of individual clients and the estates, trusts or entities they set up.
Income tax in India is levied by a central law titled the Income Tax Act, 1961 (ITA) and follows a scheduler approach to the taxation of income. The five categories of income are:
The most commonly applicable transfer taxes are the capital gains tax and an income tax on gifts between non-relatives (see Income Tax Planning for Private Clients in this section).
The maximum marginal tax rate applicable to the “total income” of individuals is 30%. Individuals may be subject to a surcharge ranging from 10% to 37%, which would result in an effective maximum rate of 42.74% in the highest band. All taxpayers, including individuals, are subject to a "cess" (tax/levy) of 4% over tax and surcharge.
The tax rate currently applicable to corporations is 25% to 30% for Indian corporations, depending on their turnover, and 40% for foreign corporations. Indian corporations are subject to a surcharge of 7% to 12%, while foreign corporations pay a surcharge of 2% to 5%. Non-corporate entities such as partnerships are taxable based on their individual composition and circumstances.
Capital gains are not subject to ordinary/progressive slab rates of income tax. Capital gains tax is levied at a flat rate which varies from 0 to 40%, depending on the residence and type of taxpayer, type of capital asset and the holding period of the asset. Gift taxes are levied at ordinary rates under the residuary income category to property received at no consideration or consideration that is lower than fair market value. Gifts from specified relatives are exempt, as are trusts created for the benefit of specified relatives. Inheritances are also exempt.
Estate Duty and Wealth Tax
At present, India does not have any inheritance tax, estate duty or wealth tax although there is talk of introducing one.
International Tax Provisions
Under the ITA, Indian residents (including individuals, companies, partnership firms and other entities) are taxed on their worldwide income, whereas non-residents are taxed only on Indian-sourced income.
The residence of individuals is determined on the basis of a day-count test of physical presence in a given financial year and/or over a specified number of previous years. The residence of entities depends on the nature of the entity. Companies are considered resident if they are incorporated in India or have a place of effective management in India. Partnerships are considered resident if they are organised in India or have a fraction of control and management in India. The residency rule for trusts is not specified in the ITA. As trusts do not have legal personality, and are otherwise taxable under the representative assessee provisions, an offshore trust could have Indian residency exposure in one of the following circumstances:
Foundations, US S-Corps and other hybrid entities would first need to be classified as corporations/ partnerships or an entity recognised in India before their Indian residency status may be determined.
India has a vast network of tax treaties, and a domestic incorporation rule in Section 90 of the ITA, which states that if tax treaty benefits are available, the domestic ITA shall only be applicable to the extent that it is more beneficial. Therefore, in considering the treatment of any cross-border structure or transaction, it is vital to evaluate the impact of any relevant tax treaty. India has been an active participant in base erosion and profit shifting (BEPS) discussions and is a signatory to the multilateral instrument (MLI), which was ratified on 12 June 2019. A total of 93 notified treaties are “covered tax agreements” modified by the MLI, which would also be relevant to evaluate while planning.
Income Tax Planning for Private Clients
In the absence of an inheritance tax or wealth tax in India, income tax planning serves as a key consideration for private clients and their succession plans. For example, no income tax is levied on inheritance. However, gifts and trusts can be subject to income tax depending on the beneficiaries and how the bequeathals are structured. A gift in favour of a “non-relative” could result in a tax on the recipient at ordinary rates. A similar tax may arise if a trust is settled in favour of a non-relative. Gifts, trusts and bequeathals by will also result in varying stamp duty and registration cost considerations. Therefore, the choice of whether to bequeath assets through a will, lifetime gift or trust usually involves a trade-off between relevant income tax consequences versus non-tax consequences, such as Indian exchange controls and asset protection benefits.
Similarly, Indian capital gains tax applies at differential rates depending upon the nature of the asset, the holding period of the asset and in some situations, the method of transfer (such as a sale of listed securities on/off the exchange). Therefore, the choice of a particular method of transfer is often based on an evaluation of its income tax consequences.
In general, private clients in India are prepared for tax uncertainty, which could derive from periodic domestic amendments to the ITA, a recent slew of amendments to the international tax regime or discussions around the potential introduction of an estate tax. Their approach regarding this state of flux is to plan on the basis of existing provisions, while ensuring they keep themselves updated regarding future tax changes.
On the domestic front, the ITA is substantially amended on an annual basis, so it is important to keep up to date on any changes. The Indian international tax regime is also in a state of periodic updating due to global developments such as BEPS, a worldwide movement towards information exchange and tax transparency, and a growing emphasis in India on tax substance to allow treaty benefits. Periodic amendments have been introduced over the last few years to reflect BEPS proposals. Furthermore, India ratified the MLI and has notified treaties with 93 countries to be “covered tax agreements” modified by the MLI.
A third kind of uncertainty relates to the possible introduction of an estate tax or inheritance tax in India. As mentioned, India does not currently have any form of death tax. Estate duty was previously in force from 1953 to 1985 – however, it was abolished as it did not meet the twin objectives for which it was introduced, namely, to reduce unequal distribution of wealth and assist Indian states in financing their development schemes. In addition, the cost of administering the estate duty was found to be high. There have been talks about the reintroduction of estate duty for a few years now, but it is uncertain when it will be introduced, if at all. This uncertainty has not prevented families from planning for the potential introduction of a duty – eg, several families and HNWIs have set up trusts in India over the last few years in expectation of the introduction of estate tax.
Income Tax Changes
Indian income tax law is amended on an annual basis. Some key amendments brought about by the Finance Act, 2020 are summarised below.
Change in tax residency rules
As per recent amendments effective from 1 April 2021, a non-resident Indian citizen/person of Indian origin now needs to spend only 120 days (reduced from 182 days) in India per year, in order to be considered a resident of India, if such person has spent more than 365 days in India over the previous four financial years and has Indian-sourced income of more than INR1.5 million. In addition, non-resident Indian citizens will also be deemed to be Indian tax residents if they are not tax resident in any other country, if their total Indian-sourced income exceeds INR1.5 million. The "resident not ordinary resident" criteria have been liberalised.
Change in personal income tax rates
From assessment year 2021–22 onwards, individuals and Hindu Undivided Families (HUFs) will have the option to apply a lower tax rate, if their total annual income is in the range of INR0.5 million to INR1.5 million, as long as they do not take advantage of several exemptions and deductions (eg, house rent allowance, deduction for medical premiums, etc).
Change in the dividend distribution tax (DDT) regime
India has significantly overhauled its dividend tax regime from a company-level distribution tax, to a shareholder-level dividend tax. Previously, DDT on dividend income was levied at 15% (excluding surcharge and education cess) in the hands of an Indian company and was exempt in the hands of shareholders, except a certain category of resident individual shareholders who were subject to an additional tax of 10% (excluding surcharge and cess) on annual dividend income in excess of INR1 million. From 1 April 2021, shareholders receiving dividends will be taxed at applicable slab rates.
Tax collected at source under the Liberalised Remittance Scheme (LRS)
From 1 October 2020, most amounts in excess of INR700,000 remitted outside India under the LRS will be subject to 5% tax collection at source.
Key Tax Measures in Response to COVID-19
Determining tax residency during COVID-19
Since most countries, including India, are operating under travel restrictions, certain days of stay in India will be disregarded for the purpose of determining an individual's tax residence status for the financial year 2019–20. Similar guidance for the financial year 2020–21 is expected in due course:
Procedural tax reliefs
Various procedural tax reliefs have been introduced, including extension of tax filing deadlines and reduction of interest on delayed payment of tax from 12% to 9% annually.
Other Legal Developments
Insolvency laws have been extended to personal guarantors
In a recent case, the Mumbai Securities Appellate Tribunal allowed the attachment of the absolute personal property (stridhan) of a female director of a company in recovery proceedings against the company. This was on the basis that the woman herself was a defaulter as a director and as such her personal property/stridhan could be attached (Ravikiran Realty India Ltd v SEBI).
Restriction on bequeathal of agricultural land to "non-agriculturalists"
The Supreme Court recently examined, in Vinodchandra Sakarlal Kapadia v State of Gujarat and Ors (Civil Appeal No 2573 of 2020), the issue of whether agricultural land could be bequeathed to a non-agriculturalist, under a will, and held that such a bequest would not be permissible, based on the relevant provisions of certain state tenancy acts. As a practical matter, children of agriculturalists are frequently considered agriculturalists, as a consequence of which this restriction should not materially impact bequests.
Minimum public float
In a recent budget announcement, the minimum public float for listed companies was proposed to be increased from 25% to 35%. This will impact family-owned listed businesses. This proposal is still under consideration, however, and has not yet been implemented.
Tackling actual/perceived tax abuse is a strong priority for the Indian government, and it has taken several measures to this end in the recent past, through the introduction of specific anti-avoidance rules and a general anti-avoidance rule, as well as several procedural changes to the manner in which information is collected and processed.
Information Disclosure and Collection
Non-residents, who were residents of India when a given foreign asset was acquired, now fall under the purview of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. Previously, only broad disclosures by Indian residents in relation to foreign income and assets were required. India has also expanded its Tax Information Exchange Agreement (TIEA) network in the last few years, and has begun to implement BEPS recommendations on country-by-country reporting.
India ranks third in the world (after China and the USA) in the list of countries having the highest number of family-owned businesses, the majority of which are in their third generation. Joint family structures are widely prevalent. However, the younger generation is more likely to be foreign-educated with different value systems, may want to set up a nuclear family, etc. Women are increasingly prominent and play a critical role in succession plans, more so in South India and cosmopolitan cities. At the same time, patriarchs are often reluctant to cede control, particularly to persons other than their son. These are some of the broad, cultural factors that influence succession planning in India. Having said this, it is important to keep in mind that India is a large and diverse country, where stark differences exist from region to region.
For example, traditional businesses have tended to be driven by religious sentiments in undertaking philanthropy. New-age entrepreneurs, on the other hand, tend to make grand philanthropic bequests towards civic causes and are more engaged in public policy initiatives.
The framework of personal laws in India also has a deep cultural component. Testamentary succession for Hindus, Buddhists, Jains and Sikhs is governed by both the Hindu Succession Act, 1956 (HSA) and certain provisions of the Indian Succession Act, 1925 (ISA) while testamentary succession for Muslims is governed by customary personal law. Both intestate and testamentary succession for Christians, Jews and Parsis is governed by the ISA. To the extent that these laws are not civil/secular laws, they are based on the customary law applicable to the relevant community.
With the Indian diaspora being prominent in different parts of the world, and with emigrants continuing to maintain strong emotional links with India, cross-border succession planning is common and a vital area for any private client adviser. At the same time, Indian tax laws, exchange control restrictions and web of personal laws make such planning complex.
The exchange control regime is one of the most important factors in influencing the structure of a succession plan. The general rule is that capital account transactions are prohibited unless specifically permitted, whereas current account transactions are freely permitted unless specifically prohibited. Specific regulations are applicable to different forms of cross-border transactions, such as transfer of shares between Indian residents and non-residents, transfer of Indian properties to non-residents, inflow and outflow of foreign exchange from India, etc. This means that most cross-border wealth transfers from private clients, in the form of lifetime gifts, testamentary or intestate bequests or settlement of trusts are required to be evaluated for compliance with exchange controls. While inheritance by individuals is permitted and straightforward, planning through any form of intermediary entity such as a trust or foundation (eg, where Indian-resident parents give to an offshore trust) can create challenges.
Issues may also arise in relation to the characterisation of offshore entities. For example, India does not have the concept of foundations. A discretionary private foundation may therefore be classified as a corporation (having separate legal personality), or a trust (on account of the discretionary beneficiary structure). If a non-resident Indian were to set up a private foundation and subsequently relocate to India or appoint a foundation board in India, this could create questions in India regarding the residence status of the offshore foundation. If it is classified as a trust with “trustees” in India, it would potentially expose the entire income of the foundation to tax in India.
India does not have any forced heirship laws applicable to Hindus (including Buddhists, Jains and Sikhs), Christians or Parsis. Such persons are governed either by the HSA or the ISA and may freely bequeath their property as they deem fit. However, Hindus are subject to a form of forced heirship on ancestral property and any property voluntarily added to the joint family pool.
Forced heirship laws are applicable to Muslims and also to persons resident in the Indian state of Goa (irrespective of their religion). A Muslim cannot by will dispose of more than one third of the surplus of their estate unless the consent of the legal heirs is obtained before or after the death of the testator. Goan residents are governed by the Goa Succession, Special Notaries and Inventory Proceedings Act, 2012 (Goa Succession Act) which imposes community property rules and some forms of forced heirship.
For the most part, India follows the separate property regime where each spouse leaves the marriage with the property to which he or she holds a title. The only exception to this rule is the state of Goa, which imposes a form of community property rules. For this purpose, the ownership of property held by them prior to marriage would depend upon whether the spouses have registered such property as their “separate property” at the time of marriage. Unregistered property is automatically considered community property. Spouses may enter into prenuptial agreements contrary to this general custom. However, such prenuptial agreements have to be registered (and notarised by special notaries as per the Goa Succession Act) in order to have binding effect.
Other religions recognise maintenance obligations towards wives. For example, Hindu law recognises the concept of stridhan as property belonging to a female Hindu of which she is the absolute owner. Muslim law recognises the concept of mahr, which is a sum of money or property that a wife is entitled to receive from her husband in consideration of the marriage.
Prenuptial and Postnuptial Agreements
Prenuptial and postnuptial agreements are not expressly recognised in India. However, they may be enforceable, like any other contract, if they satisfy essential requirements under the Indian Contract Act (such as the consent of both parties, lawful object, lawful consideration, etc) and if they are not contrary to public policy or any proven custom or personal law. Some kinds of agreements which have been held not to be enforceable are as follows:
As a general note, certain personal laws consider a marriage to be a sacramental union and not merely a contract. This has influenced courts in their opinion on whether the rights and duties of married parties may be varied by contract. For example, in the case of a marriage under Hindu law, the courts have taken the position that since a marriage is not just a contract but also a sacrament, the rights and duties of married parties may not be varied by their agreement and are governed by Hindu law (AE Thirumal Naidu v Rajammal, AIR 1968 Mad 201). The position regarding the validity of such agreements is clearer under Muslim law which treats marriage as a contract and not a sacrament. Similarly, Goan law specifically provides for the registration and notarisation of prenuptial agreements (as discussed here).
Even in situations where agreements are held to be unenforceable, their contents may be taken into consideration by the court in certain cases as a guiding factor to determine the intent of the parties.
Acquisition of property by way of a gift from relatives or by inheritance does not have any effect on the cost basis of the property, as these transfers are exempt from income tax and capital gains tax. Therefore, the cost basis of the transferor carries over to the recipient of the gift/inheritance.
There are a limited number of wealth planning vehicles in India. The most commonly utilised options to transfer assets are:
(or a combination thereof) depending upon the person’s specific requirements or planning objectives.
Of these, a will tends to be the most cost-effective option as there would be no inheritance tax and stamp duty. On the flip side, a will would offer no asset protection against future creditor claims or future inheritance tax (in the event inheritance tax is re-introduced in India) and would entail a time-consuming probate process at the time of execution.
A private trust (either as a standalone option or in combination with a family settlement) would result in stamp duty and operational costs but would be beneficial from an asset protection and future inheritance tax standpoint. It is pertinent to note that some of these considerations (eg, stamp duty costs and probate costs) differ for each Indian state and would need to be analysed as per the applicable state laws.
Family Settlement Agreements
Family settlement agreements are frequently put together in dispute situations and are considered to be tax neutral subject to the satisfaction of certain conditions in the ITA, including that the transfer should take place between individual participants to the agreement. It is also possible to transfer assets through lifetime gifts without any income tax consequences, provided that the donor and donee are “relatives” as per the statutory definition in the ITA.
India does not have specific legislation governing the disposition (both testamentary and intestate) of digital assets. The Information Technology Act, 2000 which applies to all digital information and assets, does not address succession. Therefore, such assets (including email accounts, digital photographs, cryptocurrency, etc) would be classified as "movable property" under the General Clauses Act and subject to the rules applicable to other kinds of movables. This means that they may be bequeathed under a will or transfer under the principles of intestate succession.
Digital Assets in Testate and Intestate Succession
While writing wills, testators tend to focus on traditional assets, and digital assets are often relegated to the residual provisions. If such residual provisions contemplate equal division amongst multiple heirs, the right to manage and benefit from digital assets would then be held equally by all such heirs, who may not always agree. This has resulted in contentious situations in India in the past over intangibles with financial value – notably, IPR such as trade marks 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 assets are classified as movable property, heirs would need to obtain a succession certificate from the relevant court in India to obtain possession, and ownership would most likely be split. In both intestate and testate succession, digital assets (including cryptocurrency) would be treated as a capital asset and there would be no tax at the time of inheritance. The heir would inherit the cost basis of the previous owner and be subject to capital gains tax upon sale of the asset.
Legality of Virtual Currencies
Regarding the legality of cryptocurrency, the Supreme Court recently set aside a circular issued by the Reserve Bank of India (RBI) on virtual currencies in Internet and Mobile Association of India v RBI (WP(C) No 528/2018). The Supreme Court held that the RBI failed to establish how entities regulated by it have been adversely affected on account of the interface with virtual currency exchanges. In light of this judgment, RBI’s regulated entities are no longer restricted from providing banking-related services, including maintaining accounts and the transfer/receipt of money in accounts, in relation to purchase/sale of virtual currencies.
Foundations are not recognised in India. Trusts are recognised and are the most commonly used entity for estate planning purposes, given the flexibility they afford and the neutral tax treatment.
Trusts are treated as fiscally transparent entities in India and their income may be taxed in the hands of the beneficiaries or the trustee. Trustees are the representative assessees of a trust, and their obligations depend on the beneficiaries they represent. If the beneficiaries or their shares are discretionary, the trust is taxable at the maximum marginal rate (except for capital gains tax, which is subject to a differential rate). If the beneficiaries are determinate, tax is levied based on the status of the beneficiary. If the trust is a revocable trust, the author or settlor continues to be taxable on the income of the trust as the transfer is disregarded for tax purposes. If, on the other hand, the trust has business income, they are also taxable at a maximum marginal rate. Private trusts in India are governed by the Indian Trusts Act, 1882 (Trusts Act), whereas public trusts are governed by the relevant state legislation and common law principles in the absence of specific legislation.
Hindus may also set up an HUF, an entity that holds joint family property and is governed by Hindu law. It consists of the common ancestor and all his lineal male descendants up to any generation, together with his wife and unmarried daughters. An amendment in 2005 recognised the rights of daughters (both married and unmarried) as coparceners being entitled to a share in the HUF property in the same manner as sons, unlike the previous position where a coparcenary traditionally consisted of only male lineal descendants. The income tax rates applicable to resident HUFs are the same as the rates applicable to resident individuals (below 60 years) and distributions of capital assets from an HUF are not subject to further tax.
The increase in settlement of Indian trusts over the past few years may be attributed to two key developments:
In contrast, the expanded gift tax regime in Section 56(2)(x) of the ITA has negatively impacted the settlement of trusts in India, particularly where the intended beneficiaries of such trusts are non-relatives such as philanthropic organisations or friends.
Trusts are recognised and well understood in India. Private trusts may be set up either during a person’s lifetime or under a will (ie, a testamentary trust). For tax purposes, trusts do not have separate legal personality and are either taxed in the hands of the trustee or the beneficiaries. Further information on the types of trusts in India and their tax treatment is provided in 3.1 Types of Trusts, Foundations or Similar Entities.
The Trusts Act does not restrict the appointment of Indian citizens or residents as trustees or beneficiaries of a foreign trust and vice versa. However, there is a possibility that if a foreign trust has an Indian resident as a trustee, it may be taxed in India on the basis that a part of its control and management is in India. Tax consequences may also arise in India if an offshore discretionary trust has all its beneficiaries in India, or an offshore determinate trust has the relevant determinate beneficiaries in India.
The Trusts Act does not place any restrictions on a beneficiary/donor also serving as a trustee. Briefly, a person can play any two of the three roles involved in a trust (ie, the roles of settlor, trustee or beneficiary).
If a settlor also acts as a trustee, it is possible that the trust may be regarded as a revocable trust under the ITA. In such a case, the settlement of the trust would be disregarded for tax purposes, and the income of the trust may be treated as belonging to the settlor.
Indian trust law is still at a nascent stage and is yet to introduce provisions specifically relating to settlor reserved powers. In practice, Indian trust deeds do feature such provisions. However, their validity is yet to be tested by the courts.
An irrevocable discretionary private trust is likely to be the most beneficial from an asset protection and (future) inheritance tax standpoint. However, its settlement results in stamp duty and operational costs. Furthermore, settlement of a trust is not valid if it is fraudulent, eg, undertaken to defeat an existing liability.
There may also be claw-backs under specific laws. For example, the income tax department also has the ability to render any transfer of assets void if it is by a taxpayer who has notice of pending litigation/tax proceedings, unless such transfer is made in good faith at fair value. This provision could potentially be used to void the settlement of a trust if there are existing tax liabilities. Furthermore, the Insolvency and Bankruptcy Code, 2016 (IBC) is a creditor-friendly law that provides for a two-year look-back period within which "undervalued transactions" may be clawed back, if they are entered into between a bankrupt person and their "associate". This, inter alia, includes a trustee of a trust in which the beneficiaries of the trust include the debtor.
Trusts are a common vehicle for family business succession, and are typically used alongside a softer document such as a family constitution, which serves as a guideline for the board of trustees. In the absence of a trust, families may set up bodies such as a family board or family council to take collective decisions in relation to the family business. Such boards also act as a training ground for the younger members of the family and may also be guided by a family constitution or a vision document.
The settlement of trusts in favour of relatives, or bequeathal through a will, is currently not subject to income tax in India. Therefore, these business succession strategies do not involve a material income tax component unless an internal corporate restructuring of the group holding is required. Such restructuring is frequently required at the point of creating the succession plan, to rationalise the family holding structure as well as render the succession plan enforceable. Such restructuring requires a close analysis of tax consequences. For example, if the family business is held in the form of listed securities, which the family wishes to settle into a business succession trust, an exemption would likely be sought from the securities regulator under the Takeover Code. Similarly, if the family holding consists of valuable real estate, the stamp duty consequences of setting up a succession structure such as a trust are often significant and require planning.
There are few crystallised valuation norms applicable to such transfers, particularly since there is no estate tax in India. Lifetime gifts between relatives are also generally exempt, as a consequence of which such transfers of partial interest are often not taxable. Having said this, it would be standard practice for an accountant to factor lack of marketability into the valuation of any asset.
Based on statistics for the period 2012 to 2017, disputes relating to recovery of money constitute 30.2% of the disputes in India, followed by land and property disputes which constitute 29.3% and family disputes which constitute 13.5%. In addition, about 80% of the land and property disputes in India relate to ownership or inheritance disputes. A substantial number of family disputes are referred to mediation and other forms of alternate dispute resolution.
High-value family disputes amongst HNWIs and UHNW families are particularly likely to be settled through a non-public means such as mediation. Trust disputes (ie, disputes between trustees and beneficiaries) are not currently arbitrable even if the trust deed contains an arbitration provision. If such disputes are expected, it is recommended that trustees and beneficiaries sign a specific arbitration agreement.
Family and wealth disputes in India may be resolved by approaching a Civil Court or Family Court (depending on the nature of the suit). Civil Courts have jurisdiction over suits relating to property, certain family matters such as the appointment of guardians, and administration of trusts. Family Courts typically have jurisdiction over matrimonial matters such as suits for declaration of the validity of marriage or spousal status, suits regarding property of spouses (joint or individual), suits for injunctions arising out of a marital relationship etc.
The nature of relief provided by the Civil Court or Family Court would depend on the nature of the suit. For example, a suit in a marital dispute may result in payments for the maintenance of wife and children, where the “compensation” would be determined very differently from a property dispute before the Civil Court. Some standard principles applicable to the assessment of damages are as follows:
Corporate or institutional trustees are increasingly appointed by settlors who wish for independence and continuity in the management of the trust. Although they are recognised by Indian case law, there is some uncertainty regarding the validity of institutional trustee structures where the family continues to exercise a role through protectorship/settlor reserved powers, etc. Furthermore, Indian trust law does not differentiate between the standard of care to be exercised by a corporate trustee versus an individual trustee.
Trustees may only be held personally liable for a breach of their duties under the Trusts Act. This would include liability for any improper act, neglect, default or omission by a trustee in respect of either the trust property or the beneficiary’s interest in such property. Outside a breach of trust, it is not possible to “pierce the veil” of a trust to hold trustees personally responsible for the liabilities of the trust, under Indian trust law. Having said this, see 4.1 Asset Protectionregarding look-backs/claw-backs under specific laws such as the IBC. It should be noted that there are no Indian precedents on the validity of a private trustee company (PTC).
The Trusts Act
The Trusts Act is a basic piece of legislation dating back to 1882, and there has been limited case law on newer trust structures in India. Therefore, while most institutional trustees/fiduciaries do include detailed provisions regarding exculpation and delegation in their trust deeds, the validity of such exculpatory provisions, delegation of authority, settlor reserved powers, etc, is not always certain.
Some guidance contained in the Trusts Act is as follows: trustees are not permitted to delegate their duties, either to a co-trustee or any third party, unless:
Trustees may also delegate their duties with the consent of the beneficiaries, provided such beneficiaries are competent to contract. However, there is insufficient clarity regarding the allocation of liabilities where there is such a delegation.
Exculpatory provisions would be evaluated based on the general duties of trustees under the Trusts Act, one of which is the duty to make good the loss which the trust property or beneficiary has sustained on account of the breach. Based on existing jurisprudence, such clauses should be considered to be valid to the extent that they do not exonerate trustees from more serious forms of breach (such as gross negligence and wilful default).
The general standard applied to fiduciaries is that they can make investments as an ordinary prudent person. In addition, Section 20 of the Trusts Act prescribes a list of permitted investments, which the trustees may only depart from if specifically authorised by the trust deed. It is pertinent to note that the categories of investments prescribed by the Trusts Act are restricted only to private trusts and do not restrict the modes of investment permissible in the case of charitable trusts, although such trusts may be regulated by state-specific statutes.
The modern portfolio theory is not commonly applied in India – the existing investment standard applicable to trustees is much narrower and restricts trustees to the instruments specified in Section 20 of the Trusts Act. Most trusts get around this requirement by specifically allocating powers to trustees under their deeds.
The Trusts Act does not place any restrictions on trusts holding active businesses. Trusts which run such businesses are taxable as business trusts, at the maximum marginal rate. Sometimes this creates issues when business succession trusts are set up with institutional trustees. The trust deeds of such trusts typically include anti-Bartlett provisions – their validity, however, is yet to be established by Indian courts.
The requirements to establish domicile and residency vary depending on the law in question. Residency for individuals is typically established based on the period of physical stay, whereas domicile also evaluates the “intention” of the said person in being physically present in India.
Under Indian private international law principles, questions of inheritance, status and marriage are determined by a person’s domicile. Immovable property is bequeathed based on its situs. Most Indian personal laws are applicable only if at least one of the persons involved is domiciled in India. Indian exchange control laws also make reference to the domicile of the individual.
Domicile generally attaches to a person at birth, and is changed by a conscious act of such person. It may therefore be classified into two types, ie, domicile by origin and domicile by choice. The domicile of origin of a legitimate child is the country in which the father was domiciled at the time of the child's birth. The domicile of origin of an illegitimate child is the country in which the mother was domiciled at the time of the child's birth. A person may surrender their domicile of origin, by taking up fixed habitation in another place and demonstrating their intention to stay there – this is referred to as a “domicile of choice”. A minor cannot independently acquire a domicile of choice until they reach the age of majority. If a non-Indian domiciled person wishes to take on domicile in India, they are required to file a declaration before a designated officer after being resident in India for at least one year.
India has separate laws to determine residence for tax and exchange control/ regulatory purposes. See 1.2 Stability of the Estate and Transfer Tax Laws for information regarding the residence test under tax law.
Under exchange control provisions, the residence test is contained in the Foreign Exchange Management Act, 1999 (FEMA) which states that a "person resident in India" includes an individual residing in India for more than 182 days during the course of the preceding financial year, unless:
FEMA also applies differential rules to non-residents who have Indian citizenship, or who are descended from Indian citizens.
Since the residency test under FEMA does not solely depend on the day count of the individual in the preceding financial year but also depends on the intention of the individual to stay in India or outside India, the travel restrictions and lockdowns due to the COVID-19 pandemic should not result in challenges in determining residence from an Indian exchange control perspective.
Indian citizenship may be acquired by birth, descent, naturalisation or registration in accordance with the provisions of the Citizenship Act, 1955. Briefly, for persons born in India after 1950, citizenship by birth is automatically conferred if either parent of such person is an Indian citizen.
It is also relevant to highlight that India does not permit dual citizenship – this means that if a minor acquires Indian citizenship by descent but also has foreign citizenship by birth, such foreign citizenship needs to be renounced within six months of attaining the age of majority. It is also possible to apply to the central government to become a citizen by registration.
In 2016, the Indian government introduced a scheme to grant Permanent Residency Status (PRS) for 10 years (with a multiple-entry option) to foreign investors bringing in a minimum investment of INR100 million within 18 months or INR250 million within 36 months. The investment must also generate employment for at least 20 resident Indians every year. The spouses and children of such eligible foreign investors would also be granted PRS. If a holder of PRS wishes to apply for citizenship, they would need to make a separate application and follow the prescribed process.
Since physical presence in India is not a requirement for obtaining PRS under this scheme, and since PRS merely serves as a multiple-entry visa for foreign investors without any stay stipulation, the travel restrictions and lockdowns due to the COVID-19 pandemic should not impact PRS-holders under the scheme.
While India does not have a special needs trust regime, it is increasingly common to use private trusts to provide for beneficiaries with disabilities. Since living wills/lasting powers of attorney are unlikely to be enforceable in India, some private clients also settle trust structures in advance, in anticipation and preparation for their own disability in the future.
Non-enforceability of Living Wills and Lasting Powers of Attorney
The non-enforceability of living wills and lasting powers of attorney is a serious setback to people who wish to plan for future contingencies without having to settle a trust. A living will typically states a person’s wishes as to how their property and affairs would be managed in the event they lose their mental capacity. A lasting power of attorney enables a person to appoint a representative (or next of kin) who would be authorised to make decisions concerning healthcare, property and other matters when such person is incapable of making their own decisions by virtue of physical or mental incapacity. Both are unlikely to be enforced by Indian courts. This is because there is no special legislation enabling these documents, and the Indian Contract Act, 1882 provides that an agency (including a power of attorney) would automatically be terminated in the event of incapacitation of the principal or agent.
Mental Healthcare Act
Some relief is available under the Mental Healthcare Act, 2017 (MHA) which provides for advance directives in matters relating to mental illness. Furthermore, the Supreme Court recently held, in Common Cause v Union of India, that advance medical directives may be valid in matters of grave medical illness and passive euthanasia, subject to compliance with a detailed procedure laid down by the court. Although the ruling makes some progress towards enabling people to plan for serious/terminal conditions, there are still several open questions when it comes to the validity of advance directives for lesser medical decisions and financial decisions.
Guardians and Wards Act
The principal legislation governing the rights and remedies of guardians and wards is the Guardians and Wards Act, 1890 (GWA). In addition, Hindus are governed by the Hindu Minority and Guardianship Act, 1956. There are primarily three categories of guardians:
The appointment of natural and testamentary guardians generally does not involve any court proceeding except in a contest situation. However, in the case of the appointment of a guardian under the GWA, this may be done by the relevant District Court or High Court.
Rights of Persons with Disabilities Act
The Rights of Persons with Disabilities Act, 2016 (RPWD Act) empowers a court or designated authority to appoint a limited guardian to take legally binding decisions on behalf of (and in consultation with) a person with a disability. A limited guardianship is a system of joint decision-making which operates on mutual understanding and trust between the guardian and the disabled person. Similarly, the MHA provides for the appointment of a "nominated representative" for a person with mental illness by the Mental Health Review Board (of the relevant Indian state). It is pertinent to note that a nominated representative under the MHA is only permitted to take healthcare-related decisions and not decisions in relation to the financial assets of the person with mental illness.
The decline of the joint family system in India has increased the importance of retirement planning among Indian senior citizens. Amongst HNWIs, it is common to set up trusts to plan for later years and ensure that funds are managed in a way that ensures a basic standard of living for both husband and wife. Such trusts are particularly useful in situations of medical/physical incapacity, since living wills/lasting powers of attorney are not specifically recognised and are unlikely to be enforceable in India.
Senior Citizens Savings Scheme
The Indian government also offers several pension schemes to enable persons to prepare for their retirement. Post-retirement, senior citizens sometimes opt for the Senior Citizens Savings Scheme which offers regular income and qualifies for a deduction under the ITA. They may also choose to set up a reverse mortgage scheme if they own a house and need regular cash flow. Senior citizens are also eligible for tax benefits, including differential tax slabs on their total income. These benefits are revised periodically.
Rights of Illegitimate Children
Under Hindu intestate succession law, children born during the subsistence of a marriage are deemed to be legitimate irrespective of whether such marriage was void or voidable. This is known as “deemed legitimacy” and typically applies in situations of bigamous marriages or other forms of void/voidable marriages. Such illegitimate children are granted a right to inherit the property of their parents as per the Hindu Marriage Act, 1955 (HMA).
The benefit of deemed legitimacy is not applicable to children born from illicit/adulterous relationships. Furthermore, Section 16(3) makes it abundantly clear that illegitimate children would only be entitled to inherit the property of their parents and no other relatives. A similar provision also exists in the Special Marriage Act, 1954 (SMA) which extends to children born in marriages solemnised between persons domiciled in India (irrespective of their religion or community). Therefore, deemed legitimacy is applicable not only to children born in marriages solemnised between Hindus but persons belonging to other communities as well, if they were married under the SMA.
This rule does not apply to children born in marriages solemnised under a different personal law and their situation would depend on the personal law applicable.
Rights of Adopted Children
Children may be adopted under a secular law, the Juvenile Justice (Care and Protection of Children) Act, 2015 (JJA), or a religious personal law known as the Hindu Adoption and Maintenance Act, 1956 (HAMA)
HAMA is only applicable to adoptions by Hindus of children born to Hindus. It confers upon the adoptee the same rights and privileges in the family of the adopter as a legitimate child. Furthermore, an adopted child is entitled to inherit in the same manner and to the same extent as a natural-born child, except in certain cases (eg, if the child has been adopted by a disqualified heir).
The JJA allows adoptions by communities whose personal (religious) laws do not recognise adoption – examples being Muslim, Christian and Parsi law. Prior to the introduction of the JJA, individuals in such communities could only take on guardianship responsibilities under the GWA. However, this did not give adopted children the full rights (such as inheritance rights) of biological children. The JJA addresses this issue and children adopted under this Act are akin to biological children.
In the absence of a statute governing surrogacy in India, surrogate pregnancy arrangements are currently governed by the contract between the parties and the draft Assisted Reproductive Technique Clinics Guidelines. However, the Union Cabinet recently approved the Surrogacy (Regulation) Bill, 2020 (Surrogacy Bill, 2020) in February 2020 after incorporating the recommendations of a select committee to the erstwhile Surrogacy (Regulation) Bill, 2019 (Surrogacy Bill, 2019).
As per the erstwhile Surrogacy Bill, 2019 Indian couples would be permitted to have a child through a surrogate, acting on an altruistic basis (ie, without consideration), provided that the surrogate was a "close relative" who was married and already had a biological child of her own. The condition requiring the surrogate to be a close relative has now been done away with in the Surrogacy Bill, 2020 and any "willing" woman is now permitted to act as a surrogate, although commercial surrogacy continues to be restricted. In addition, non-Indian-origin couples, single men, partners in live-in relationships and homosexuals are not likely to be permitted to take advantage of surrogacy arrangements as per the Surrogacy Bill, 2020.
Same-sex marriages are not recognised in India. Until very recently, homosexuality was considered criminal due to a relic in the IPC that criminalised “carnal intercourse against the order of nature”. This provision was struck down by the Supreme Court in Navtej Singh Johar v Union of India (Writ Petition (Criminal), No 76 of 2016) as being “irrational, indefensible and manifestly arbitrary” to the extent that it applies to consensual intercourse between adults.
Domestic partners are not expressly conferred legal status in India. However, certain cases in the recent past have recognised "live-in relationships" and conferred rights upon them in specific situations. If the partners have cohabited together for a long time, the Indian Evidence Act states that a presumption is created in favour of wedlock. Cases have also held that there is a presumption of legitimacy for children born in such relationships. This presumption may be rebutted, but a heavy burden lies on the person who seeks to disprove the legitimate relationship, as the law leans in favour of legitimacy.
Charitable giving in India has tended to be driven more by religious/cultural factors than by laws/tax exemptions. However, entities set up with a defined “charitable purpose” can register as tax-exempt entities under the ITA, subject to the satisfaction of certain requirements. Contributions to such tax-exempt entities are then allowed a whole/partial tax deduction in the hands of the donor. The introduction of the Corporate Social Responsibility (CSR) Rules, 2014 under which certain companies are required to contribute 2% of their net profits towards CSR activities, has given a significant boost to the non-profit sector.
Some Indian families choose to carry out philanthropy through their business entities under the CSR route, whereas some choose to set up separate charitable entities. The entities that are most commonly used for charitable planning are charitable/public trusts, Section 8 companies and charitable societies.
A charitable/public trust is a popular vehicle for philanthropic activities, except in specified states such as Maharashtra which have public trust legislation. In such states, public trusts are governed by a charity commissioner, who typically has wide powers of control and oversight over the trust’s activities. This limits the operational flexibility of trustees, who therefore sometimes prefer a Section 8 company. In states without public trust legislation, the trust deed is simply registered under the Registration Act, 1908 and subject to the terms specified in the instrument, which allows flexibility in decision-making. However, even such public trusts (set up in unregulated states) are subject to restrictions under the ITA if they choose to apply for tax-exempt status. It is relevant to note that families previously used to include an allocation for philanthropy in private family trusts. This is now no longer common practice due to an amendment to India’s gift tax regime, which taxes settlements in favour of non-relatives (which would include a charity).
Section 8 Companies
A Section 8 company is organised under the Indian Companies Act, 2013 and is regulated by the Ministry of Company Affairs (MCA). It is similar to a private limited company, except that it is required by law to apply its income and corpus only to charitable objects. A member of a Section 8 company cannot receive remuneration or distributions from the company, barring exceptions such as reimbursements. Section 8 companies allow limited discretion over allocation of funds, take longer to set up (80–90 days), and have high operational costs for compliance as compared to public trusts.
Charitable societies are governed by the Societies Registration Act, 1860. Such entities are organisationally heavy as they are required to have a minimum number of seven persons and to file details of their governing body/managing committee members annually (ie, list of names, addresses and occupations) with the registrar of societies for that state. Societies are not typically preferred by private clients for this reason.
Taxable Private Entities
In addition to the entities listed above, philanthropy planning in India is unique to the extent that private clients sometimes carry on philanthropy through taxable private entities. This is because the regulations applicable to charitable activities are complex, and individuals and families sometimes prefer the operational flexibility afforded by private entities over tax exemptions. If any of the entities listed here anticipate receiving foreign contributions, they would need to satisfy requirements under the Foreign Contribution (Regulation) Act, 2010.