MAXIMUM MARGINAL RATE OF TAX UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Maximum marginal rate

Section 2(29C) of the Income Tax Act, 1961 defines the expression ‘maximum marginal rate’ as the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year.

Marginal tax rates are important when it comes to financial planning. For taxpayers, knowing about marginal tax rates is necessary in order to ascertain what amount of their raises or bonuses they get to keep after deduction of taxes. It is also helps taxpayers to determine how much they can contribute to their retirement accounts, which yield them tax benefits.  In certain cases, like in the case of a Trust of an Association of Person (AOP), income is required to be taxed at the maximum marginal rate, which means there will be no exception limit or slab rate.

Liability of representative assessee

Section 161(1) of the Act provides that-

• Every representative assessee as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favor of him beneficially.
• He shall be liable to assessment in his own name in respect of that income.
• However, any such assessment shall be deemed to be made upon him in his representative capacity only; and
• the tax shall, subject to the other provisions contained in Chapter XV, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.

Section 161(1A) provides that notwithstanding anything contained in Section 161(1) where the income of the beneficiary in the hands of trustee being representative assessee consists of or includes profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is liable at the maximum marginal rate.

Section 161(1A) overrides Section 161(1) but it does not have the effect of overriding the other provisions of the computation of total income under other heads like sections 22 to 25 or sections 45 to 55A or sections 56 to 59.

Non applicability of marginal rate of tax

The proviso to Section 161(1A) provides that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him.

When shares of beneficiaries are unknown

Section 164(1) of the Act provides that where any income in respect of which the trustee liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section referred to as ‘relevant income’, ‘part of relevant income’ and ‘beneficiaries’, respectively), tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. 

The first proviso to section 164(1) provides that the maximum marginal rate of income tax shall not apply in the following cases-

• Where none of the beneficiaries-

• has taxable income exceeding the exemption limit as applicable to an association of person; and
• is a beneficiary under any other private trust; and

• Where the relevant income of part of the relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him
• Where the trust, yielding the relevant income or part thereof was created by a non testamentary instrument before 01.03.197 and the Assessing Officer is satisfied that it was created bona fide exclusively for the benefit of the relatives of the settler, or where the settler is a Hindu Undivided Family, exclusively for the benefit of members of such family in circumstances where such relatives or members were mainly independent on the settler for their support and maintenance; or
• Where the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on business or professional exclusively for the benefit of his employees.

If the case falls within any four of the above exceptions, the ‘relevant income’ or part of the relevant income of the trust is to be taxed at the rate applicable to an association of persons i.e., the slab rate which is same as applicable in case of individual of less than 60 years old, HUF etc.

In COMMISSIONER OF INCOME-TAX VERSUS AMBALA SARABHAI D. TRUST. - 2003 (12) TMI 22 - GUJARAT HIGH COURT it was held that where the share of beneficiaries and gave the income of such beneficiary, a mere resolution cannot convert the nature of trust from discretionary to specific.  Therefore the trust shall be liable to pay tax on its income as a discretionary trust instead of beneficiary.

The second proviso to Section 164(1) provides that where any income, in respect of which the trustee(s) is liable as representative assessee, consists of, or includes, profits and gains of business, the above first proviso (relating to trust to be taxed at the rate applicable to an association of persons) shall apply only if-

• such profits and gains are receivable under a trust declared by any person by will;
• such a trust is exclusively for the benefit of any relative dependent on him for support and maintenance; and
• such trust is the only trust so declared by him.

Case of oral trust

Where a trustee receives of is entitled to receive any income on behalf or for the benefit of any person under an oral trust, then, notwithstanding anything contained in any other provisions of the Act shall be charged on such income at the maximum marginal rate.