Taxation of Trusts, Unknown Beneficiary Shares and Oral Trusts (Income-tax Act, 2025)

When a trustee receives income for beneficiaries, the Income-tax Act, 2025 can tax it at the maximum marginal rate or at the rate applicable to an association of persons (AOP). Section 307 covers written trusts and court-appointed managers where the beneficiaries or their shares are not clearly fixed. Section 308 taxes income of an oral trust at the maximum marginal rate, whatever else the Act says.

The key point is documentation. A trust deed that names each beneficiary and states each share keeps income out of the top-rate rule. A vague or unwritten arrangement does not. All provisions below are as amended by the Finance Act, 2026 (tax year 2026-27 onwards), with the section number next to each.

Who is taxed on trust income: the trustee or the beneficiary?

Section 303(1) makes the trustee a representative assessee, meaning the person who answers to the tax department for income received on behalf of someone else. This covers:

• a trustee under a trust declared by a duly executed written instrument, testamentary or otherwise, including a valid wakf deed (section 303(1)(d));
• a trustee under an oral trust (section 303(1)(e));
• the Court of Wards, Administrator-General, Official Trustee, or a court-appointed receiver or manager (section 303(1)(c)).

Under section 303(4), every representative assessee is treated as an assessee for the purposes of the Act. Sections 307 and 308 then decide the rate at which the income in the trustee's hands is charged.

What is an oral trust under the Income-tax Act, 2025?

Section 303(3) defines an oral trust as a trust that is not declared by a duly executed instrument in writing and is not deemed to be so declared under section 303(2).

Section 303(2) gives a way out. An unwritten trust is deemed to be a written one if the trustee signs a statement in writing and sends it to the Assessing Officer. The statement must set out the purposes of the trust, particulars of the trustees, the beneficiaries and the trust property. It must be sent:

• within three months from the date of declaration of the trust; or
• for a trust declared before 1 June 1981, within three months from that day.

At what rate is trust income taxed when beneficiary shares are unknown?

Section 307(1) applies to income received by the persons in section 303(1)(c) and (d) (court-appointed managers and trustees under a written trust). The income, or the part concerned, is taxed at the maximum marginal rate if either condition holds:

• 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 whom it is receivable are indeterminate or unknown.

Section 2(70) defines the maximum marginal rate as the rate of income-tax, including surcharge, applicable to the highest slab of income for an individual, association of persons or body of individuals, as specified in the Finance Act of the relevant year.

What makes a share "known" or a beneficiary "specific"?

Section 307(5) sets a strict test. Income is deemed not specifically receivable for any one person unless that person is expressly stated in the court order, trust instrument or wakf deed and is identifiable on the date of that order, instrument or deed. The same applies to shares: they are deemed indeterminate or unknown unless expressly stated in the document and ascertainable on that date.

This means a trust that says "income to be divided among my grandchildren as the trustees think fit" will usually fail the test, because no named person has a stated share on the date of the deed.

When does the AOP rate apply instead of the maximum marginal rate?

Section 307(2) softens the rule. Even when shares are unknown, the income is taxed at the rate applicable to an association of persons, as if it were the trust's total income, if any one of these holds:

1. No beneficiary is a taxpayer above the AOP exemption limit. None of the beneficiaries has other income chargeable under the Act exceeding the maximum amount not chargeable to tax for an AOP, or is a beneficiary under any other trust (section 307(2)(a)).
2. A single will trust. The income is receivable under a trust declared by a person by will, and it is the only trust so declared by him (section 307(2)(b)).
3. An old family trust. The trust was created before 1 March 1970 by a non-testamentary instrument, and the Assessing Officer is satisfied it was created bona fide exclusively for the settlor's relatives (or members of the settlor's HUF), who were mainly dependent on the settlor for support and maintenance (section 307(2)(c)).
4. An employee fund. The income is received by trustees for a provident, superannuation, gratuity, pension or similar fund created bona fide by a person carrying on business or profession exclusively for the benefit of employees in that business or profession (section 307(2)(d)).

What if the trust income includes business profits?

Section 307(3) is stricter. Where the income of a section 303(1)(d) trust consists of or includes profits and gains of business, tax is charged at the maximum marginal rate on that income, subject to section 307(4).

Section 307(4) is the exception: if the business profits are receivable under a trust declared by a person by will, exclusively for a relative dependent on him for support and maintenance, and it is the only trust he so declared, the AOP rate applies.

How are oral trusts taxed under section 308?

Section 308(1) is blunt. If a trustee receives or is entitled to receive income for the benefit of any person under an oral trust, tax is charged on that income at the maximum marginal rate, irrespective of anything in any other provision of the Act. Unlike section 307, there is no AOP-rate exception list, and the beneficiary's identity or share does not change the outcome.

Situation	Rate on trustee's income	Provision
Written trust, beneficiaries named, shares stated and known on the deed date	Section 307 rate rules not triggered on this ground	307(1), 307(5)
Written trust, shares unknown or beneficiaries not specific	Maximum marginal rate	307(1)
Same, but a 307(2) exception applies (for example a single will trust)	AOP rate	307(2)
Business profits in a written trust, not a dependent-relative will trust	Maximum marginal rate	307(3)
Business profits, single will trust for a dependent relative	AOP rate	307(4)
Oral trust	Maximum marginal rate	308(1)

Can the tax department recover from the beneficiary instead of the trustee?

Yes. Section 304(1) gives the trustee the same duties and liabilities as if the income were received beneficially, and assessment is made on the trustee in that representative capacity. Section 304(3) lets the Assessing Officer assess the beneficiary directly, or recover the tax from the beneficiary, despite the representative-assessee rules. Under section 304(5), the officer can proceed against any property in the trustee's control or management, whether the demand is raised on the trustee or on the beneficiary. Where only part of a trust's income is chargeable, section 304(4) apportions the beneficiary's share by the chargeable part of the trust income.

How much tax difference does this make? Two worked examples

Assumptions for both examples (tax year 2026-27): the trust's income is Rs 10,00,000. The AOP is taxed on the section 202(1) slab Table, which is Nil up to Rs 4,00,000, 5% from Rs 4,00,001 to Rs 8,00,000, and 10% from Rs 8,00,001 to Rs 12,00,000. Cess and surcharge are ignored. The top slab rate in that Table is 30% (above Rs 24,00,000). The actual maximum marginal rate under section 2(70) also includes surcharge, so the true figure is higher than shown.

Example 1: AOP rate on Rs 10,00,000

Step	Slab	Income in slab	Rate	Tax
1	Up to Rs 4,00,000	Rs 4,00,000	Nil	Rs 0
2	Rs 4,00,001 to Rs 8,00,000	Rs 4,00,000	5%	Rs 20,000
3	Rs 8,00,001 to Rs 10,00,000	Rs 2,00,000	10%	Rs 20,000
	Total	Rs 10,00,000		Rs 40,000

Example 2: top slab rate on the same Rs 10,00,000

1. Income: Rs 10,00,000.
2. Top slab rate used for illustration: 30%.
3. Tax = Rs 10,00,000 x 30% = Rs 3,00,000, before surcharge and cess.

The gap in these examples is Rs 3,00,000 minus Rs 40,000 = Rs 2,60,000. That is why the drafting of a trust deed matters. The same income and the same trustee can produce very different tax depending on whether the shares are fixed in writing.

Real-life examples

Ravi's family trust with named shares. Ravi settles a written trust for his two daughters, Meena and Kavya, naming each in the deed and stating that each gets 50% of the income. Both are identifiable and their shares are ascertainable on the date of the deed, so the section 307(5) test is met and section 307(1) is not triggered on the "unknown share" ground.

Suresh's discretionary trust. Suresh's deed says the trustee will distribute income among "my grandchildren" in such proportions as the trustee decides. No grandchild is named and no share is stated, so under section 307(5) the shares are deemed indeterminate. Unless a section 307(2) exception applies, the income is taxed at the maximum marginal rate under section 307(1).

Anita's single will trust. Anita's will creates one trust for the benefit of her elderly mother, with shares not fixed. Because it is the only trust Anita declared by will, section 307(2)(b) applies and the income is taxed at the AOP rate.

Dev's handshake arrangement. Dev tells his brother Mohan to hold Rs 5,00,000 of rental income for their sister Pooja, with nothing in writing and no statement sent to the Assessing Officer. This is an oral trust under section 303(3). Section 308(1) charges Mohan, as trustee, at the maximum marginal rate on that income.

Common mistakes

• Assuming an unwritten trust is harmless. Section 308 applies the maximum marginal rate to oral trust income regardless of other provisions.
• Missing the three-month statement. A signed statement to the Assessing Officer within three months of declaration is what converts an unwritten trust into a deemed written one under section 303(2).
• Describing beneficiaries by class only. "Children" or "grandchildren" without names and shares fails the section 307(5) tests.
• Naming beneficiaries but not shares. Both the person and the share must be stated and ascertainable on the date of the deed.
• Overlooking the business-income rule. Section 307(3) can push business profits to the maximum marginal rate even where the AOP rate would apply to other income of the same trust.
• Treating the section 307(2) exceptions as automatic. Each has conditions, and the old family trust exception needs the Assessing Officer's satisfaction.

Quick reference

Item	Detail	Provision
Who files for the trust	Trustee as representative assessee	303(1), 303(4)
Time to send statement for unwritten trust	Within 3 months of declaration (3 months from 1 June 1981 for older trusts)	303(2)
Maximum marginal rate	Highest slab rate including surcharge, as specified in the Finance Act of the year	2(70)
Oral trust rate	Maximum marginal rate	308(1)
Share and beneficiary test	Expressly stated and identifiable on the date of the instrument	307(5)

Where this is in the Act

• Section 303: representative assessee, deemed written trust, oral trust definition
• Section 307: charge of tax where share of beneficiaries is unknown
• Section 304: liability of representative assessee
• Section 308: charge of tax in case of oral trust
• Section 2(70): maximum marginal rate
• Section 202: slab Table used for the AOP illustration

For a CA firm with several trust clients, the difficult part is tracking which trusts have named shares, which were created by will, and which statements were filed on time. Finexo's practice management software lets you keep these as client-level checklists and deadlines. It does not decide the tax rate for you. For another deduction-at-source topic under the new Act, see TDS on rent under the Income-tax Act, 2025.

This article is general information, not tax advice. Trust taxation turns on the exact wording of the instrument, so read the deed with a qualified professional.