Income Tax 2025

Appearance

Charge of tax where share of beneficiaries unknown. ​

307(1) ​

Subject to the other provisions of this section, the income or any part thereof, in respect of the person mentioned in sections 303(1)(c) and (d) shall be chargeable to tax at the maximum marginal rate, if––

  • (a) such income or such part thereof is not specifically receivable on behalf or for the benefit of any one person; or
  • (b) the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown.

307(2) ​

The income or any part thereof as referred to in sub-section (1), shall be chargeable to tax at the rate applicable to an association of persons, if,—

  • (a) none of the beneficiaries has any other income chargeable under this Act exceeding the maximum amount not chargeable to tax in case of an association of persons, or is a beneficiary under any other trust; or
  • (b) such income or part of such income is receivable under a trust declared by any person by will and such trust is the only trust declared by him; or
  • (c) such income or part of such income is receivable under a trust created before the 1st March, 1970, by a non-testamentary instrument and the Assessing Officer is satisfied, having regard to all the circumstances existing at the relevant time, that the trust was created bona fide–– (i) exclusively for the benefit of the relatives of the settlor; or (ii) exclusively for the benefit of the members of such family, where the settlor is a Hindu undivided family, in circumstances where such relatives or members were mainly dependent on the settlor for their support and maintenance; or
  • (d) such income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession.

307(3) ​

Subject to the provisions of sub-section (4), where the income in respect of the person mentioned in section 303(1)(d) consists of, or includes, profits and gains of business, tax shall be charged at the maximum marginal rate on the whole of the income.

307(4) ​

Where the profits and gains referred to in sub-section (3) are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him, tax shall be charged at the rate applicable to an association of persons.

307(5) ​

For the purposes of this section,––

  • (a) such income or any part thereof shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the tax year is expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed;
  • (b) the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the order of the court or the instrument of trust or wakf deed and are ascertainable as such on the date of such order, instrument or deed.
Explanation

Section Summary: ​

Section 307 deals with the taxation of income in cases where the beneficiaries of a trust or similar entity are either unknown or their shares in the income are indeterminate. The section specifies the tax rates applicable in such scenarios, distinguishing between cases where the income is taxed at the maximum marginal rate and cases where it is taxed at the rate applicable to an association of persons (AOP).

Key Changes: ​

  1. Clarification on Tax Rates: The section clarifies when income is taxed at the maximum marginal rate versus the AOP rate, based on the nature of the trust, the beneficiaries, and the timing of the trust's creation.
  2. Specific Conditions for AOP Rate: Introduces specific conditions under which income can be taxed at the AOP rate, such as when beneficiaries have no other taxable income or when the trust is created for specific dependent relatives.
  3. Business Income Treatment: Explicitly states that business income received by certain trusts will be taxed at the maximum marginal rate unless specific conditions (like dependency and exclusivity) are met.

Practical Implications: ​

  • Trusts with Indeterminate Beneficiaries: If the beneficiaries or their shares are not clearly defined, the income will be taxed at the maximum marginal rate, which is typically higher than the AOP rate.
  • Trusts for Dependents: Trusts created for the benefit of dependent relatives or employees (e.g., provident funds) may qualify for the lower AOP rate, provided they meet the specified conditions.
  • Business Income in Trusts: Business income received by trusts will generally be taxed at the maximum marginal rate unless the trust is exclusively for dependent relatives and meets other criteria.

Critical Concepts: ​

  1. Maximum Marginal Rate: The highest rate of tax prescribed under the Income Tax Act, applicable to individuals or entities with the highest income slabs.
  2. Association of Persons (AOP): A group of individuals or entities who come together for a common purpose and are taxed as a single entity.
  3. Indeterminate Shares: When the beneficiaries' shares in the income are not clearly defined or specified in the trust deed or court order.
  4. Bona Fide Trust: A trust created in good faith, without any ulterior motive, and for legitimate purposes.

Compliance Steps: ​

  1. Documentation: Ensure that the trust deed, court order, or wakf deed clearly specifies the beneficiaries and their shares, if applicable.
  2. Identify Beneficiaries: If beneficiaries are dependent relatives or employees, maintain proper records to prove their dependency or employment status.
  3. Tax Rate Determination: Assess whether the income qualifies for the AOP rate or must be taxed at the maximum marginal rate based on the conditions outlined in the section.
  4. Reporting: Accurately report the income and applicable tax rate in the tax return, ensuring compliance with the provisions of this section.

Examples: ​

  1. Indeterminate Beneficiaries: A trust is created for the benefit of "the poor and needy" without specifying individual beneficiaries or their shares. The income from this trust will be taxed at the maximum marginal rate.
  2. Dependent Relatives: A trust is created by a will for the sole benefit of the settlor’s dependent spouse. If the spouse has no other income exceeding the tax-free limit, the trust’s income will be taxed at the AOP rate.
  3. Business Income in Trust: A trust receives business income. Unless the trust is exclusively for dependent relatives and meets the conditions under Section 307(4), the income will be taxed at the maximum marginal rate.

This section ensures that income from trusts is taxed appropriately based on the clarity of beneficiaries and the purpose of the trust, balancing fairness and compliance.