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Section 307 Income Tax Act 2025: How Are Trusts Taxed When Beneficiary Shares Are Unknown?

Section 307 explains how income held by certain trustees and other representative assessees is taxed when beneficiaries or their individual shares are not identified or ascertainable. The general rule is taxation at the maximum marginal rate, subject to specific exceptions and special treatment for business income.

Legal position: Section 307 forms part of Chapter XVII of the Income-tax Act, 2025, effective from 1 April 2026. It broadly corresponds to Section 164 of the Income-tax Act, 1961. This article reflects the consolidated Act as amended by the Finance Act, 2026. The applicable rate and facts should be verified for the relevant tax year.

What does Section 307 provide?

Under Section 307(1), income (or the relevant portion) received by a person covered by Section 303(1)(c) or (d) is ordinarily taxable at the maximum marginal rate where either of the following applies:

  • The income is not specifically receivable on behalf of, or for the benefit of, any one person; or
  • The individual shares of the persons for whose benefit the income is received are indeterminate or unknown.

This commonly concerns discretionary trusts, but the actual statutory categories and terms of the relevant court order, trust instrument or wakf deed control the result. It is not a blanket rule for every trust.

When does the association-of-persons rate apply instead?

Section 307(2) provides specified situations in which the income covered by subsection (1) is taxed at the rate applicable to an association of persons (AOP), treating it as the AOP's total income:

  1. Beneficiary income condition: None of the beneficiaries has other income chargeable under the Act above the maximum amount not chargeable to tax for an AOP, or is a beneficiary under any other trust.
  2. Sole testamentary trust: The income arises under a trust declared by a person by will, and it is the only trust declared by that person.
  3. Specified older family trust: A non-testamentary trust created before 1 March 1970, where the Assessing Officer is satisfied that it was bona fide created exclusively for the settlor's relatives, or, for a Hindu undivided family settlor, its family members, who were mainly dependent on the settlor for support and maintenance.
  4. Employee benefit fund: The trustees receive income on behalf of a bona fide provident, superannuation, gratuity, pension or other fund created by a person carrying on business or profession exclusively for the benefit of employees of that business or profession.
Important: Each exception depends on its exact statutory conditions. The ordinary AOP rate is not automatic merely because a trust has several beneficiaries.

What if the trust earns business income?

Under Section 307(3), subject to subsection (4), where income received by a person covered by Section 303(1)(d) consists of or includes profits and gains of business, the business-income component is charged at the maximum marginal rate.

Section 307(4) creates a narrow exception where the business profits are received under a trust declared by will exclusively for the benefit of a relative dependent on the testator for support and maintenance, and that is the only trust declared by the testator. In that case, the relevant income is taxed at the rate applicable to an AOP.

These rules require a separate examination of business receipts, the beneficiary class and the trust's creation instrument.

Relevant statutory tests and definitions

Maximum marginal rate: The statutory expression refers to the highest rate of income tax, including applicable surcharge, for the relevant category under the Act. It should not be assumed to be a fixed percentage for every tax year; consult the definition in Section 2 and the applicable rate provisions.
Representative assessee: A person assessable on behalf of another under Section 303, including relevant court-appointed receivers or managers and trustees falling within clauses (c) and (d).
Determinate or known share: Under Section 307(5)(b), an individual share is treated as indeterminate or unknown unless it is expressly stated in the court order, trust instrument or wakf deed and ascertainable on the date of that document.
Identifiable beneficiary: Under Section 307(5)(a), income is treated as not specifically receivable for one person unless that person is expressly stated in the relevant court order, trust instrument or wakf deed and identifiable on its date.
AOP: Association of persons. Section 307 uses the tax rate applicable to an AOP as a special alternative in the circumstances expressly provided.

Practical examples

Example 1: Trustee has discretion over shares

A trust deed permits trustees to distribute annual income among three beneficiaries in any proportions, without fixing their shares. The individual shares may be indeterminate for Section 307(1). The maximum marginal rate is the starting point, subject to an applicable exception under subsection (2).

Example 2: Shares fixed in the trust deed

A trust deed expressly identifies two beneficiaries and fixes their shares at 60% and 40% on the date of execution. The indeterminate-share condition under Section 307(5) would generally not arise solely because the trustees distribute income later. Other relevant charging provisions still require examination.

Example 3: Sole trust created by will

A person creates only one trust by will. If its income falls within Section 307(1), the exception in Section 307(2)(b) may permit taxation at the AOP rate, subject to the trust and income satisfying the statutory wording.

Frequently asked questions

Does every discretionary trust pay tax at the maximum marginal rate?

No. Section 307(1) sets the general rule for relevant indeterminate-beneficiary income, but subsection (2) contains exceptions and subsections (3) and (4) contain special rules for business income.

Is the maximum marginal rate the same as the highest basic slab rate?

Not necessarily. The statutory definition and applicable surcharge and tax-rate provisions must be considered for the relevant tax year.

Can beneficiaries be identified after a trust deed is executed?

Section 307(5) looks to whether the beneficiaries and shares are expressly stated and identifiable or ascertainable on the date of the relevant instrument or order. A later allocation alone does not necessarily satisfy that test.

What is the corresponding provision in the 1961 Act?

Section 164 of the Income-tax Act, 1961 broadly corresponds to Section 307 of the Income-tax Act, 2025. The operative wording and applicable period should be checked before relying on older authorities.

Official law and related reading

Read the official consolidated Income-tax Act, 2025 (as amended by Finance Act, 2026) and the Income Tax Department's 2025 Act resource. See also Section 303, Section 304, and Section 306.

Updated: 11 November 2026. General legal information; not a substitute for advice on a particular trust or tax year.