Section 164 of ITA, 1961 : Section 164: Charge Of Tax Where Share Of Beneficiaries Unknown

Explanation using Example

Imagine there is a trust that has been set up by a wealthy individual, Mr. Sharma, for his descendants. The trust deed does not specify the exact share each beneficiary is to receive and instead allows the trustees to decide the distribution of income each year based on the beneficiaries' needs at that time. This trust's income, therefore, has beneficiaries with indeterminate shares.

According to Section 164 of the Income-tax Act, 1961, the income of such a trust, where the individual shares of beneficiaries are unknown or indeterminate, would be taxed at the maximum marginal rate. This means that instead of the income being taxed at the individual tax rates of the beneficiaries, it would be taxed at the highest tax rate applicable to individuals in India.

However, if Mr. Sharma's trust was the only trust he set up exclusively for his relatives who were dependent on him and it was created by a non-testamentary instrument before March 1, 1970, the trust income might be taxed at the rates applicable to an association of persons (AOP), which could be lower than the maximum marginal rate, subject to the trust meeting other specified conditions under the Act.