Taxation of Indeterminate Beneficiary Trusts : Clause 307 of the Income Tax Bill, 2025 Vs. Section 164 of the Income Tax Act, 1961

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.... often hinges on the clarity regarding the identity and share of beneficiaries. The legislative intent behind such provisions is to prevent tax avoidance through the creation of discretionary or indeterminate-beneficiary trusts and to ensure equitable tax treatment across various forms of trusts and representative arrangements. Section 164 of the Income Tax Act, 1961, currently governs the taxation of income in similar circumstances. It sets out the framework for taxing income where the shares of beneficiaries are unknown or indeterminate, providing for taxation at the maximum marginal rate, subject to certain exceptions. Both provisions aim to plug the loophole of indeterminate or discretionary trusts escaping higher tax liability, while ....

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....ersons mentioned in Clause 303(1)(c) and (d) (presumably corresponding to trustees and similar representatives) shall be chargeable to tax at the maximum marginal rate if: * (a) Such income is not specifically receivable on behalf of 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 is receivable are indeterminate or unknown. This provision mirrors the principle that in the absence of determinacy regarding the beneficiary or their share, the highest marginal tax rate should apply. This acts as a safeguard against trusts being used as a means to defer or avoid tax by keeping the identity or share of the beneficiary ambiguous. 3.2. Sub-section (2): Except....

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....or Business Income Clause 307(3) provides that where the income in respect of the person mentioned in Clause 303(1)(d) consists of, or includes, profits and gains of business, the entire income shall be taxed at the maximum marginal rate. This is a stricter provision, reflecting the policy concern that business income routed through indeterminate-beneficiary trusts should not escape the highest rate of tax. Clause 307(4) carves out an exception to sub-section (3): where such business profits are receivable under a trust declared by will exclusively for the benefit of a dependent relative, and such trust is the only one so declared by the testator, the income shall be taxed at the AOP rate. This recognizes the legitimacy of certain testame....

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....e protected from penal taxation, provided their structure and operation meet the requirements of the exception. 4.4. For Revenue Authorities The provision provides clear guidelines for assessing officers to determine the appropriate tax rate based on the nature of the trust, the determinacy of beneficiaries, and the presence of business income. The deeming provisions reduce litigation and ambiguity. 5. Comparative Analysis with Section 164 of the Income Tax Act, 1961 5.1. Structural Similarities Clause 307 is, in substance and structure, a restatement of Section 164, with updated references and language. The core principles are identical: * General rule of taxation at the maximum marginal rate where the shares of beneficiaries are u....

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....business income, with narrow exception. 307(4): Exception to (3) - will trust for dependent relative, only trust, taxed at AOP rate 164(1) Second Proviso: Same exception Substantially identical. 307(5): Definitions - what constitutes "not specifically receivable" and "indeterminate/unknown" shares Explanation 1 to 164: Same definitions Directly carried over; ensures clarity and consistency. 5.3. Notable Differences * Charitable/Religious Trusts: Section 164 contains detailed sub-sections (2) and (3) dealing with trusts for charitable or religious purposes, including the treatment of income not exempt under section 11 or section 12 and partial trusts. Clause 307, as reproduced, does not explicitly address charitable/....