Trust as MF investor

A trust as a mutual fund investor refers to any public or private trust constituted under the Indian Trusts Act, 1882, or under state public charitable trust legislation, that invests corpus or surplus funds in units of SEBI-registered mutual fund schemes. Trusts are a common vehicle for long-term wealth preservation in India, and their investment activity in mutual funds is governed by the trust deed, applicable law, and the investment guidelines issued by the Income Tax Department for registered trusts.

Types of trusts investing in mutual funds

The major categories of trusts that invest in mutual funds are:

• Public charitable trusts, constituted for charitable, religious, educational, or public utility purposes; registered under state public trust acts (e.g., Maharashtra Public Trusts Act, 1950) or under the Societies Registration Act, 1860.
• Private trusts, constituted for the benefit of identified beneficiaries; governed by the Indian Trusts Act, 1882.
• Religious trusts / temples, constituted for the maintenance and management of temples or other religious institutions; often registered under state legislation.
• Provident fund trusts and superannuation trusts, exempt trusts under Sections 17 and 58 of the Income Tax Act that maintain approved employee benefit funds; subject to special investment restrictions (see provident fund and superannuation MF investing).
• Mutual fund trusts themselves, a SEBI-registered mutual fund is itself constituted as a public trust. Such trusts are not covered here; this article addresses trusts as investors in mutual fund schemes.

Eligibility under SEBI regulations

SEBI (Mutual Funds) Regulations, 1996, Third Schedule, includes “trusts” as eligible investors in mutual fund schemes. A trust may invest in all scheme categories except ELSS, the Section 80C deduction for ELSS is restricted to individuals and HUFs.

For public charitable trusts registered under Section 12A or 12AB of the Income Tax Act, investment must comply with the accumulation and application provisions of Sections 11 and 13. A trust that violates investment norms (e.g., invests more than 5 per cent of corpus in a single company’s shares) risks losing exemption under Section 11 for that year.

Authority to invest, trust deed

The trust deed is the governing document and must:

• expressly permit investment in mutual fund units (or in “securities” broadly, which is construed to include mutual fund units);
• designate the managing trustee or authorised trustees who may execute investment transactions;
• specify any investment restrictions (e.g., only government securities, only debt instruments) that would preclude equity fund investment.

Where the trust deed is silent on mutual fund investment, the trustees may rely on Section 20 of the Indian Trusts Act, 1882, which specifies the permissible investments for a private trust (principally government securities, fixed deposits, and other approved instruments). Mutual fund units, particularly equity funds, are not listed in Section 20; private trustees investing in equity funds without explicit deed authorisation may be in breach of trust. Public charitable trusts typically have wider investment latitude under their trust deed.

KYC documentation

Entity-level documents:

Beneficial owner identification:

For a public charitable trust, the “controlling persons” are the trustees (all of them). For a private trust, the settlor, trustees, and beneficiaries who hold 25 per cent or more of the trust’s assets are beneficial owners and must be identified with PAN and identity/address proof.

Trustee-level documents:

• PAN and identity/address proof for each authorised trustee.
• Photograph.

FATCA/CRS self-certification is filed by the trust, typically categorised as a Passive NFE, with all controlling persons (trustees) disclosed.

Taxation

Registered public charitable trusts (Section 12A/12AB)

A trust registered under Section 12A or 12AB of the Income Tax Act enjoys exemption from tax on income applied for charitable purposes under Section 11. Capital gains from the sale/redemption of mutual fund units held as part of the corpus are exempt if:

• the gains are treated as part of the corpus; or
• the gains are applied for charitable purposes within the stipulated period (same financial year or accumulated under Section 11(1)(b) for up to 5 years).

If the gains are not applied or accumulated properly, they are included in total income and taxed at the maximum marginal rate (30 per cent plus surcharge and cess) per Section 164(2).

Short-term capital gains on equity funds (taxed at 20 per cent under Section 111A) and long-term capital gains (taxed at 12.5 per cent under Section 112A) are the applicable base rates before the Section 11 exemption is applied.

Unregistered or private trusts

Unregistered trusts, including private trusts for identified beneficiaries, are assessed as follows:

• If the shares of beneficiaries are determinate (known and specific), income is taxed in the hands of beneficiaries.
• If the shares are indeterminate, the trust is taxed at maximum marginal rate on all income (Section 164).

For private trusts with determinate beneficiaries, capital gains from mutual fund redemptions are added to the beneficiary’s income and taxed at the beneficiary’s applicable rate.

No TDS for charitable trusts

There is no TDS deduction on capital gains for trusts. TDS at 10 per cent under Section 194K applies to IDCW payouts where the aggregate exceeds Rs 5,000 from a single AMC.

Compliance obligations

Public charitable trusts registered under Section 12A/12AB must:

• file Form 10A/10AB for registration or renewal;
• file ITR-7 annually reporting income, expenditure, and investments;
• comply with Section 13 investment restrictions (no investment in a company in which any trustee or specified person has a substantial interest);
• ensure that not more than 5 per cent of total income is invested in a manner that contravenes Section 13(1)(d).

Investment restrictions under Section 13 of the Income Tax Act

Section 13 of the Income Tax Act, 1961 disqualifies a charitable or religious trust from claiming Section 11 exemption if any part of its income enures to the benefit of specified persons (settlors, trustees, their relatives, or companies in which they have a substantial interest). Investment restrictions under Section 13(1)(d) include:

• investing more than 5 per cent of corpus in any single company’s shares (with exceptions for government securities);
• holding shares in a company in which any trustee, or a person who has contributed more than Rs 50,000 to the trust, has a beneficial ownership exceeding 20 per cent.

For mutual fund investments, each mutual fund scheme is not treated as a single company; therefore the 5 per cent concentration limit does not directly apply to MF scheme investments. However, if a scheme’s underlying portfolio has concentrated exposure to a related company, the trust must ensure that the practical effect does not contravene Section 13.

Investment in overnight and liquid funds, operational use

Many charitable trusts receive large periodic inflows (grants, donations, fundraising proceeds) and must deploy them temporarily while awaiting charitable application. Overnight and liquid mutual funds are used for this purpose because:

• they offer next-day or same-day redemption;
• the capital is not locked in;
• returns are marginally superior to bank savings rates;
• the trust’s Section 11 exemption covers the income earned.

This is the most common practical use of mutual funds by charitable trusts rather than long-term equity investment.

Waqf boards and minority institution trusts

Waqf boards and trusts constituted under the Waqf Act, 1995 are distinct from trusts under the Indian Trusts Act. Their investment activities are governed by the Waqf Act and the Central Waqf Council’s guidelines, which broadly permit investment in government securities and fixed deposits. Mutual fund investment by Waqf institutions requires express authorisation from the State Waqf Board and the Central Waqf Council; it is not universally available.

Similarly, trusts constituted for Buddhist, Sikh, Jain, or other religious communities and registered under respective community legislation (e.g., Sikh Gurdwara Act, 1925) have their investment authority defined by the relevant statute and the trust’s governing body.

Regulatory framework

• Indian Trusts Act, 1882, private trust investment rules
• Income Tax Act, 1961, Sections 11, 12A, 12AB, 13, 164, trust taxation and exemption
• SEBI (Mutual Funds) Regulations, 1996, trust as eligible investor
• PMLA Rules, 2005, beneficial owner identification for trusts

See also

• Corporate body MF investor
• Provident fund and superannuation MF investing
• HUF as MF investor
• Mutual fund
• SEBI

References

1. SEBI (Mutual Funds) Regulations, 1996, Third Schedule, eligible investors.
2. Indian Trusts Act, 1882, Section 20, permissible investments for trustees.
3. Income Tax Act, 1961, Sections 11, 12A, 12AB, 13, 164, trust income taxation.
4. Maharashtra Public Trusts Act, 1950, state trust regulation.
5. PMLA Rules, 2005, Rule 9, controlling person identification for trusts.
6. AMFI guidelines on KYC documentation for trust investors.