Section 164(2) of the Income Tax Act, 1961, deals with the taxation of discretionary trusts, including charitable and religious trusts, where the beneficiaries’ shares are indeterminate or unknown. Below is a detailed analysis of its applicability, conditions, and tax implications.
1. Applicability of Section 164(2)
This section applies when:
✅ Trust income is discretionary (beneficiaries’ shares are not fixed).
✅ Trust is not registered under Section 12A/12AA/12AB (i.e., not eligible for exemption under Sections 11-13).
✅ Trust is a private trust (not exclusively for public charitable/religious purposes).
📌 Note:
- Public charitable/religious trustsregistered under Section 12A/12AA/12AB are exempt under Sections 11-13 and not covered under Section 164(2).
- Private discretionary trusts(e.g., family trusts) fall under this provision.
2. Tax Rate Under Section 164(2)
If applicable, the entire income of the trust is taxed at:
- Maximum Marginal Rate (MMR)(currently 30% + surcharge + cess).
- No basic exemption limit(unlike individuals/HUF).
📌 Exceptions:
- If any specific beneficiaryis entitled to a definite share, their portion is taxed at individual slab rates.
- If the trust is revocable, income is taxed in the hands of the settlor.
3. Key Conditions Triggering Section 164(2)
| SCENARIO | TAX TREATMENT |
| Trust income is not applied to beneficiaries (discretionary) | Taxed at MMR (30%+) |
| Beneficiaries’ shares are unknown/indeterminate | Taxed at MMR |
| Trust is not registered under Section 12A/12AA | No exemption under Sections 11-13 |
| Private trust with mixed charitable & non-charitable objectives | Non-charitable portion taxed at MMR |
4. Comparison with Section 164(1) (Non-Discretionary Trusts)
| PARAMETER | SECTION 164(1) | SECTION 164(2) |
| Nature of Trust | Beneficiaries’ shares are fixed | Beneficiaries’ shares are indeterminate |
| Tax Rate | Slab rates (as per beneficiary) | Maximum Marginal Rate (30%+) |
| Exemption | Possible if charitable | No exemption (unless registered under Section 12A) |
5. Compliance & Filing Requirements
- ITR-5(for trusts/institutions).
- Audit mandatoryif income exceeds ₹2.5 lakh (Section 44AB).
- Form 10B(if claiming exemption under Sections 11-13).
📌 Penalty for Non-Compliance:
- 12% interestunder Section 234B for late payment.
- Disallowance of exemptionsif registration lapses.
