08 Aug 2025
In this update:
Partner: Tanmay Patnaik, Associates: Sidharth Rathore and Trusha Modi
The applicability of surcharge to discretionary private family trusts has long been debated – specifically, whether the highest surcharge rate automatically applies or whether it must follow the income-based thresholds set for the relevant year.
The Special Bench of the Income Tax Appellate Tribunal (Tribunal), in Araadhya Jain Trust v ITO, held that surcharge on discretionary trusts must follow the slab-based thresholds prescribed under the Finance Act, and not the maximum rate of 37% by default. The Tribunal clarified that while the maximum marginal rate dictates the base income tax rate (30%), surcharge is a separate levy, which must be computed on the applicable income thresholds. This view aligns with the earlier ruling of the Hyderabad Bench of the Tribunal in Shriram Trust v ITO.
Therefore, unless the discretionary trust’s income crosses the prescribed thresholds under the Finance Act, surcharge cannot be levied at the highest rate. This is a welcome clarification as earlier rulings had differed on how surcharge should be levied.
The “Big Beautiful Bill” (Bill), a major U.S. tax reform, aims to make permanent the historically high estate and gift tax exemption limits introduced by the 2017 Tax Cuts and Jobs Act (TCJA), which were otherwise scheduled to sunset on 1 January 2026.
The Bill, now signed into law, increases the unified federal estate and gift tax exemption to approximately USD 15 million per person1 (to be indexed for inflation from 2026), instead of allowing it to revert to approximately USD 7 million per person post-2025 (after the sunsetting of the TCJA rates). The increased exemption limit is likely to ensure continuity in high-net-worth estate planning strategies, including gifting and dynasty trust structures.
For Indian-origin families with U.S. assets or U.S. persons in the family tree, the Bill offers an opportunity to execute tax-efficient wealth transfers (such as transfers to appropriately structured private family trusts or strategic gifting of high-capital appreciation assets).
Given the possibility of future administrations rolling back currently available lifetime exemption limits or otherwise adversely altering the gift and estate tax regime, families may wish to lock in the exemption through timely planning, especially with respect to assets with high potential for capital appreciation.
[1] An increase from the current lifetime exemption limit under the 2017 Tax Cuts and Jobs Act (inflation adjusted)
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