Oral Trust Tax, Partly Taxable Trust Income and Direct Assessment or Recovery
The Income-tax Act, 2025 reorganises the provisions that were contained in Sections 164A, 165 and 166 of the Income-tax Act, 1961. The oral trust rule is now contained in Section 308, while the rules for partly taxable trust income and direct assessment or recovery are incorporated in Section 304.
Section 308 - Charge of tax in case of oral trust
Section 308 of the Income-tax Act, 2025 contains the special charging rule for an oral trust. Where a trustee receives, or is entitled to receive, income on behalf of or for the benefit of a person under an oral trust, the provision applies notwithstanding other provisions of the Act and charges tax on that income at the maximum marginal rate.
Meaning and effect of an oral trust
An oral trust is relevant where the trust arrangement does not satisfy the statutory requirements for a written trust or written declaration contemplated by the representative assessee provisions. The consequence of Section 308 is that income falling within the oral trust rule is taxed at the maximum marginal rate.
Maximum marginal rate
The expression "maximum marginal rate" is a defined tax concept. For an oral trust covered by Section 308, the special rate applies to the relevant income received or receivable by the trustee on behalf of or for the benefit of the person represented.
Section 304(4) - Where only part of trust income is chargeable
Former Section 165 of the Income-tax Act, 1961 has been incorporated into Section 304(4) of the Income-tax Act, 2025. It deals with a trust whose income is only partly chargeable to tax.
If only part of the income of a trust is chargeable under the Act, the portion of the income receivable by a beneficiary that is treated as derived from the chargeable part is determined proportionately.
Statutory formula
- A = the chargeable part of the income of the trust;
- B = the whole income of the trust; and
- C = the income receivable by the beneficiary from the trust.
This proportional rule prevents the whole amount received by a beneficiary from being treated as derived from taxable trust income where only part of the trust's total income is chargeable.
Section 304(3) - Direct assessment or recovery not barred
Former Section 166 is now reflected in Section 304(3) of the Income-tax Act, 2025. The provision preserves the Assessing Officer's power to proceed directly against the person for whose benefit the income is receivable.
Effect of Section 304(3)
Irrespective of the representative assessee provisions in the Chapter, the Assessing Officer may directly assess the person on whose behalf or for whose benefit the income is receivable, or may recover from that person the tax payable in respect of the income.
The provision therefore makes clear that the statutory machinery relating to representative assessees does not eliminate the power of direct assessment or recovery from the person beneficially concerned.
Former Section 164A of the Income-tax Act, 1961
Section 164A provided that where a trustee received or was entitled to receive income on behalf of or for the benefit of any person under an oral trust, tax was chargeable on that income at the maximum marginal rate, notwithstanding other provisions of the 1961 Act. The provision also linked the expression "oral trust" to the definition contained in the representative assessee provisions.
Former Section 165 - Part of trust income chargeable
Section 165 provided a proportional attribution rule. Where only part of the income of a trust was chargeable, only the corresponding proportion of the income receivable by a beneficiary was deemed to have been derived from the chargeable part of the trust income. This rule is now expressed through the formula in Section 304(4) of the 2025 Act.
Former Section 166 - Direct assessment or recovery not barred
Section 166 provided that the preceding representative assessee provisions did not prevent direct assessment of the person on whose behalf or for whose benefit the income was receivable, or recovery from that person of tax payable in respect of such income. The corresponding rule is now contained in Section 304(3).
Section correspondence under the 1961 and 2025 Acts
| Subject | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Charge of tax in case of oral trust | Section 164A | Section 308 |
| Case where part of trust income is chargeable | Section 165 | Section 304(4) |
| Direct assessment or recovery not barred | Section 166 | Section 304(3) |
Practical application
For an oral trust, the first issue is whether the arrangement falls within the statutory concept of an oral trust and therefore attracts the maximum marginal rate. Where only part of trust income is taxable, Section 304(4) provides the proportional method for identifying the beneficiary's amount attributable to the chargeable portion. Section 304(3), meanwhile, preserves direct assessment and recovery against the person for whose benefit the income is receivable.
For older tax periods, assessment years, pending proceedings and other transitional situations, the provisions of the Income-tax Act, 1961 may remain relevant. The applicable Act, tax year and saving provisions should therefore be identified before applying a section number or tax treatment.
This article explains the statutory framework in general terms. Tax consequences depend on the applicable tax year, trust instrument or declaration, identity and rights of beneficiaries, nature of income and other provisions of the Income-tax Act.