Tax Planning explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Tax planning through a will can create an HUF, establish a private trust for minors outside section 64(1A) clubbing, transfer assets without consideration outside section 64(1), secure an annual charge for daughters, and make charitable bequests under section 11.
Why a will is a tax planning instrument
The handbook devotes a section of its chapter on the benefits of a will to tax planning through wills, and lists six items. What links them is timing: a will operates at a moment when property changes hands without consideration and without a living transferor, which is exactly the moment at which several of the Income Tax Act's anti-avoidance provisions do not bite.
The six tax planning items
| # | Item | What the handbook states |
|---|---|---|
| 1 | HUF creation | A will can facilitate the creation of a Hindu Undivided Family by transferring property |
| 2 | Private trust for minors | A private trust can be established in a will for the deferred benefits of minor children, preventing income from being clubbed under section 64(1A) |
| 3 | Asset transfers | Assets can be transferred without consideration, avoiding the clubbing provisions of section 64(1) |
| 4 | Annual charges for daughters | A will can secure an annual charge on property for the benefit of daughters |
| 5 | Charitable bequests | The testator may designate certain properties for charitable purposes by creating a charitable trust, allowing trustees to claim income tax exemptions under section 11 |
| 6 | Executor taxation | Under section 168, the income of the deceased's estate is taxable in the hands of the executor until distribution is complete |
The two clubbing points are the substance of tax planning through a will, and they are worth understanding rather than memorising.
Section 64(1) and section 64(1A) attribute income back to a transferor who has moved an asset to a spouse, a minor child or an associated person during his lifetime. A testamentary disposition has no living transferor to attribute income to — the transferor is dead, and the transfer takes effect only on death.
The handbook's point about item 2 is narrower and sharper. Where a testator wants to provide for a minor grandchild, giving the property to the child's parent creates one problem and giving it to the child creates another. A private trust created by the will, holding for the deferred benefit of the minor, is the structure the handbook identifies.
Both propositions are stated by the handbook without citation, and both depend on the trust deed's own terms and on the beneficiary's status. Test them against the current provisions before relying on them for a specific client.
Executor taxation under section 168
Item 6 is not a planning opportunity but an obligation, and it is the one that most often surprises the family member who accepts the office.
Under section 168 of the Income Tax Act, 1961, the income of the deceased's estate is taxable in the hands of the executor until the distribution of assets is complete. If there are multiple executors, the estate's income will be taxed as if it were an association of persons. And each executor is assessed separately from his own income.
Read the three sentences together and the practical consequence emerges. Between death and the completion of distribution, the estate's income is neither the deceased's nor the beneficiaries' — it is assessed in the executor's hands, but separately from the executor's own income.
That means a separate set of records and a separate filing, running for however long administration takes. Where administration drags — a contested estate, an unsold property, a probate application — the obligation runs with it.
Two consequences for tax planning at the drafting stage. First, a shorter administration is a tax simplification, which is an argument for clear specific gifts, a residuary clause and a competent executor. Second, appointing multiple executors triggers AOP treatment for the estate's income, so the convenience of naming two children jointly has a cost — one worth mentioning before the will is executed.
The inheritance tax point
Among the benefits of a will the handbook lists "Minimization of Inheritance Tax", saying that "a carefully drafted will can help reduce the amount of inheritance tax that your heirs may owe after your passing, ensuring more of your estate is preserved for your beneficiaries."
India levies no inheritance tax and no estate duty. Estate duty was abolished decades ago and has not been reintroduced. The passage appears to have been drawn from a jurisdiction that does levy one, and it is reproduced here as printed rather than adopted.
Nothing in this item should be passed to a client as a reason to make a will in India. The genuine tax planning reasons are the five other items in the list — HUF creation, the private trust for minors, transfers outside section 64, the annual charge, and the charitable trust under section 11 — together with the practical value of a short, clean administration under section 168.
Several other items in the same list read as though written for a foreign system: the reference to a "legal guardian for your estate" who will be "deactivating bank cards", and the observation that "certain states do not acknowledge deathbed or oral Wills". Treat the benefits list as general encouragement and take the Indian law from the substantive chapters.
The charitable bequest structure
Item 5 is the one most likely to be actioned in an Indian estate of any size, and the handbook's formulation is precise: the testator designates certain properties for charitable purposes by creating a charitable trust, and it is the trustees who claim the exemption under section 11.
The structure therefore has three limbs to get right in the will itself — the property designated, the trust created, and the objects for which it is held. The handbook's own draft format carries a compact version of this, directing that any surplus after paying liabilities, executor fees and probate expenses "should be donated to a charitable trust ……… for the purpose of …… (Objectives)".
Whether the trustees can in fact claim exemption under section 11 depends on registration and compliance by the trust, which the will cannot secure. Where a charitable gift is intended, the safer structure is a bequest to an existing registered trust, identified by name and registration number, rather than a direction to create one after death.
The annual charge for daughters
Item 4 — securing an annual charge on property for the benefit of daughters — is a traditional device that solves a practical problem: providing an income to a daughter without fragmenting an immovable property among several heirs.
The handbook's fourth draft format shows the related mechanism at work, though for a spouse rather than a daughter: the estate is given to executors and trustees to hold on trust, who after meeting management expenses pay the net income to the wife, may spend out of the corpus for medical expenses or pilgrimage, but are not entitled to sell or mortgage the immovable property. On her death the estate passes to the children absolutely in equal shares.
Practical checklist for tax planning through a will
- Use the will's testamentary character as the basis of the section 64 points, not a general exemption.
- For a minor beneficiary, consider a private trust created by the will rather than an outright gift.
- Name an existing registered charitable trust rather than directing one be created.
- Warn the executor about the section 168 obligation before he accepts.
- Mention the AOP consequence of appointing multiple executors.
- Draft for a short administration — clear gifts, a residuary clause, a competent executor.
- Use an annual charge where an income is wanted without splitting a property.
- Do not cite inheritance tax as a reason for Indian tax planning.
Common mistakes
- Repeating the inheritance tax benefit to an Indian client.
- Assuming the section 64 points hold without testing the trust's terms.
- Directing a charitable trust be created after death and assuming section 11 follows.
- Appointing several executors without explaining the AOP treatment.
- Leaving the estate in administration for years and ignoring its filings.
- Giving a daughter a share of an indivisible property where a charge would serve better.