Taxation on Special Rate Income for Private Discretionary Trust

[PRIYAM KHAMBHATA]

Respected Sir

My Private Discretionary Trust having indeterminate share of beneficiaries,. According to Section 164(1), Income of the private discretionary trust would be charged tax at the Maximum Marginal Rate (MMR), when the individual shares of the beneficiary are indeterminate or unknown. Therefore, slab rate is not applicable to SVAR Family Trust.

In Return of Income filed for AY 2025-26, there were Income from House Property, Capital Gain, Business & Profession and Income from other sources. In the Return of Income filed, Tax has been charged at MMR on Income from House Property, Income from Business & Profession and Income from Other Sources. and Tax has been charged at special rate on special rate income (Capital gain income).

While processing the Return of Income by Income tax -CPC, entire incomes (including Special Rate Income from Capital Gain) have been Taxed at MMR Rate and demand raised.

Please guide me, what would be action taken against the demand raised due to the reason Special Rate Income taxed at MMR.

AI Summary

Special-rate capital gains in discretionary trusts raise questions where return processing applies maximum marginal taxation to all income.
Taxation of a private discretionary trust is considered where beneficiaries' shares are indeterminate or unknown and other income is taxed at the maximum marginal rate. Capital gains were treated as special-rate income in the return, with the special rate applied separately. Return processing instead applied the maximum marginal rate to all income, including capital gains, resulting in a demand. The issue concerns the appropriate response to that demand.