Section 307 of the Income-tax Act, 2025 — Charge of Tax Where Share of Beneficiaries is Unknown (Discretionary Trusts)

In plain language

What Section 307 says in plain English

Section 307 decides how much tax a trustee (a "representative assessee") must pay when a trust's income is not clearly earmarked for identified beneficiaries. It is the 2025 Act's replacement for the well-known Section 164 of the Income-tax Act, 1961, and the core policy is unchanged: if you cannot say who gets the income or how much each person gets, the income is taxed at the Maximum Marginal Rate (MMR) — the highest slab rate plus applicable surcharge and cess that applies to an individual/AOP.

This is an anti-avoidance provision. Without it, families could park income in a "discretionary trust", keep beneficiary shares vague, and dodge the higher slabs. Section 307 blocks that by charging the whole income at the top rate in the trustee's hands.

Who it applies to

• Representative assessees under Section 303(1)(c) and (d) — essentially trustees appointed under a trust deed, a written instrument, an oral trust, or a wakf.
• Private discretionary trusts where the settlor left it to the trustees' discretion to decide who benefits and by how much.
• Trusts where beneficiary shares are "indeterminate or unknown" on the date the trust was created (or the relevant date).

It does not hit an ordinary specific trust — where each beneficiary and their exact share is named. Those are taxed under Section 306 (representative assessee taxed "in the same manner and to the same extent" as the beneficiary would have been).

When is a share "indeterminate or unknown"?

Section 307 treats income as chargeable at MMR where either:

• 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 receivable are indeterminate or unknown.

The section clarifies (in its explanatory sub-section) that shares are treated as known only if they are expressly stated in the trust deed, will, wakf deed or court order and are ascertainable as such on the date of the instrument. Vague language, or leaving it to trustee discretion, means MMR.

The exceptions — when the softer AOP rate applies instead of MMR

Section 307 carves out situations where the income is instead taxed at the rate applicable to an Association of Persons (AOP) — i.e. normal slab rates as if the income were the total income of an AOP, not the punitive MMR. Broadly, the AOP rate applies where:

• No beneficiary has other taxable income — none of the beneficiaries has any other income above the basic exemption limit, and none is a beneficiary under any other trust;
• Sole testamentary trust — the income is received under a trust declared by will, and it is the only trust so declared by the testator;
• Genuine old family trust — a non-testamentary trust created before 1 March 1970 exclusively for the benefit of relatives (or family members) mainly dependent on the settlor, where the settlor had no taxable income;
• Employee benefit funds — income of a recognised/approved provident fund, superannuation fund, gratuity fund or pension fund, or a fund for the exclusive benefit of employees;
• Other prescribed circumstances under the rules.

Business income — an even stricter rule

Where the indeterminate trust's income includes profits and gains of a business (trustees under Section 303(1)(d)), the whole of that business income is charged at MMR. The only relief is a testamentary (will) trust created exclusively for the benefit of a relative dependent on the settlor for support and maintenance, and only if it is the settlor's sole such trust — in that case the AOP rate applies. This discourages using discretionary trusts to run businesses at concessional rates.

How it interacts with related sections

• Section 303 defines who a representative assessee is — Section 307 only applies to categories (c) and (d) (trustees/wakf).
• Section 306 covers specific (determinate) trusts — taxed as the beneficiary would be.
• Sections 304 & 305 preserve the department's right to assess either the trustee or the beneficiary, and the trustee's right to recover the tax from trust assets.

Practical implications

• If you run a private family/discretionary trust, vague beneficiary clauses can cost you the top ~39% MMR (30% + surcharge + 4% cess) on the entire income.
• Name beneficiaries and fix their exact percentage shares in the deed to fall under the gentler Section 306 treatment.
• Estate/succession planning via a will can qualify for the AOP-rate exception if structured as a sole testamentary trust.