Income Tax Law | Trust Taxation | Updated October 2026

Section 164A: Tax on Oral Trusts Under the Income-tax Act

Section 164A of the Income-tax Act, 1961 imposed tax at the maximum marginal rate on income received or receivable by a trustee for a beneficiary under an oral trust. The corresponding provision under the Income-tax Act, 2025 is Section 308, applicable under the new law from 1 April 2026.

What is an oral trust?

Under Explanation 2 to Section 160(1) of the 1961 Act, an oral trust is a trust not declared by a duly executed written instrument (including a qualifying valid wakf deed) and not deemed to be a written trust under Explanation 1. The distinction is based on the statutory documentation requirements, not merely the way trustees describe the arrangement.

Explanation 1 to Section 160(1) allows a trust without a duly executed written instrument to be deemed a written trust where a statement signed by the trustee or trustees, identifying the trust purposes, trustees, beneficiaries and trust property, is forwarded to the Assessing Officer within the prescribed period. For trusts declared on or after 1 June 1981, the period is generally three months from declaration; a separate historical deadline applied to earlier trusts.

Section 164A: Statutory rule under the 1961 Act

Where a trustee receives or 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 provision of this Act, tax shall be charged on such income at the maximum marginal rate.

The section's Explanation refers to the definition of oral trust in Explanation 2 to Section 160(1). The former clause (i) of that Explanation was omitted with effect from 1 April 1989; it should not be treated as an operative provision.

Meaning of maximum marginal rate

The maximum marginal rate is the highest income-tax rate applicable to the relevant category under the governing Act, including applicable surcharge as specified in the statutory definition. It should not be assumed to be a single fixed percentage for every tax year. The applicable tax computation and any cess must be checked against the law for the relevant tax year.

Section 308 of the Income-tax Act, 2025

Section 308(1) provides that where a trustee receives or is entitled to receive income for a person under an oral trust, tax is charged on that income at the maximum marginal rate, irrespective of other provisions of the Act. Section 308(2) adopts the meaning of oral trust assigned by Section 303(3). This preserves the central charging rule while updating the statutory references.

Illustrative application

Suppose trustees hold income for identified beneficiaries but the arrangement is an oral trust within the statutory definition. Section 164A (or Section 308 for a tax year governed by the 2025 Act) generally requires taxation of the income at the maximum marginal rate. Identification of beneficiaries alone does not override the specific oral-trust charging rule. Whether a timely signed written statement changes the classification must be determined from the facts and the applicable statutory requirements.

Practical compliance considerations

• Retain the executed trust deed, if any, and records of the trust's creation.
• Document the trust's purpose, trustees, beneficiaries, assets and sources of income.
• Preserve proof of any signed declaration furnished to the Assessing Officer and the date of submission.
• Apply the statute and tax rates governing the relevant tax year, including transition and saving provisions.

Official legislation and guidance

• Income-tax Act, 2025 - official text (see Sections 303 and 308)
• Income-tax Act, 1961 - official consolidated text
• Section 164A - Income Tax Department
• Section 160 - definition and documentation of oral trusts
• Income-tax Act, 2025 portal and transition resources

Legislative history

Section 164A was inserted by the Finance Act, 1981 with effect from 1 April 1981. Clause (i) of its Explanation was omitted with effect from 1 April 1989. The provision was subsequently carried forward in substance as Section 308 of the 2025 Act.

This article provides general statutory information, not advice for any particular trust or assessment.