Charge of tax in case of oral trust.

308(1)

The income of the person appointed under an oral trust as mentioned in section 303(1)(e) shall be chargeable to tax at the maximum marginal rate, irrespective of anything contained in any other provision of this Act.

308(2)

For the purposes of this section, “oral trust” shall have the meaning assigned to it in section 303(3).

Explanation

Section Summary:

This section addresses the taxation of income generated by a person appointed under an oral trust. An oral trust is a trust created verbally without a written document. The key point here is that the income of such a person (appointed under the oral trust) will be taxed at the maximum marginal rate, regardless of any other provisions in the Income Tax Act.

Key Changes:

• New Provision: This section introduces a specific rule for taxing income from oral trusts, which was not explicitly addressed in the prior Income Tax Act.
• Tax Rate: The income is taxed at the maximum marginal rate, which is the highest tax rate applicable under the Income Tax Act. This is a significant departure from the general tax rates that might otherwise apply to trust income.

Practical Implications:

• Taxpayers: Individuals or entities appointed under an oral trust will face a higher tax burden, as their income will be taxed at the maximum marginal rate.
• Trusts: Oral trusts, which are often informal arrangements, will now be subject to stricter tax treatment, potentially discouraging their use.
• Compliance: Trustees or beneficiaries of oral trusts must ensure proper reporting of income and pay taxes at the higher rate.

Critical Concepts:

• Oral Trust: Defined in Section 303(3), an oral trust is a trust created verbally without a written instrument. It is often used in informal arrangements.
• Maximum Marginal Rate: This is the highest tax rate prescribed under the Income Tax Act, currently 30% for individuals (plus applicable surcharge and cess). For companies, it may vary based on their classification.
• Interaction with Other Laws: This section overrides other provisions in the Income Tax Act, meaning no deductions, exemptions, or lower tax rates will apply to income from oral trusts.

Compliance Steps:

1. Identify Oral Trusts: Determine if the arrangement qualifies as an oral trust under Section 303(3).
2. Report Income: Ensure all income generated by the person appointed under the oral trust is reported in the tax return.
3. Pay Tax at Maximum Marginal Rate: Calculate and pay tax at the maximum marginal rate applicable for the relevant financial year.
4. Maintain Documentation: Even though the trust is oral, maintain records of income and tax payments for compliance purposes.

Example:

• Scenario: Mr. A is appointed as a trustee under an oral trust created by his father. The trust generates ₹10 lakh in income during the financial year.
• Application: Under Section 308(1), Mr. A must pay tax on the ₹10 lakh at the maximum marginal rate (e.g., 30% + surcharge + cess), regardless of his personal income tax slab or any deductions he might otherwise claim.
• Outcome: Mr. A’s tax liability on the trust income will be significantly higher than if the income were taxed under normal provisions.