Section 165 of the Income-tax Act: When Only Part of Trust Income Is Taxable
Section 165 of the Income-tax Act, 1961 explains how to identify the taxable portion of income received by a beneficiary when only part of the trust's total income is chargeable to income tax.
Meaning and scope of Section 165
The rule applies when a trust has both income that is chargeable to tax and income that is not chargeable, and a beneficiary receives an amount from that trust. Instead of attributing the entire beneficiary receipt to either category, the law allocates the receipt proportionately.
Statutory provision: Section 165 (1961 Act)
Where part only of the income of a trust is chargeable under this Act, that proportion only of the income receivable by a beneficiary from the trust which the part so chargeable bears to the whole income of the trust shall be deemed to have been derived from that part.
Official reference: Income Tax Department - Section 165. The consolidated Income-tax Act, 1961 also sets out the provision.
How the proportionate allocation works
To identify the portion of a beneficiary's trust receipt attributable to chargeable income, divide the trust's chargeable income by its total income and apply that ratio to the beneficiary's receipt.
Illustrative example
| Particulars | Illustrative amount |
|---|---|
| Total trust income | Rs. 10,00,000 |
| Portion chargeable under the Act | Rs. 4,00,000 |
| Beneficiary's receipt from the trust | Rs. 2,00,000 |
| Proportion attributable to chargeable income | 40% |
| Deemed chargeable-source portion of receipt | Rs. 80,000 |
The calculation attributes Rs. 80,000 of the receipt to the chargeable portion of trust income. It does not by itself determine the final tax payable: the applicable charging, exemption, representative assessment and other provisions must also be considered.
Interaction with other trust taxation provisions
Section 161 addresses liability of a representative assessee. Section 164 addresses cases in which beneficiaries or their shares are indeterminate or unknown. Section 164A concerns oral trusts. Section 165 is an allocation rule and should not be mistaken for an independent exemption or tax rate.
The Income Tax Department provides a broader guide to liability in special cases, including trust taxation and representative assessees.
Position under the Income-tax Act, 2025
The corresponding provision is included in Section 304 (Liability of representative assessee) of the Income-tax Act, 2025. The new Act consolidates several related provisions previously appearing in Sections 161, 165, 166 and 167 of the 1961 Act. For current tax years, review the official Income-tax Act, 2025 (PDF) and the Income Tax Department's 2025 Act portal.
Frequently asked questions
Does Section 165 make the entire trust distribution taxable?
No. It attributes to the chargeable part only the same proportion of the beneficiary's receipt as the trust's chargeable income bears to its total income.
Is the amount calculated under Section 165 necessarily the final taxable income?
No. The provision identifies the portion deemed to arise from chargeable trust income. Other applicable provisions determine assessment and actual tax liability.
Which provision should be checked from 1 April 2026?
Section 304 of the Income-tax Act, 2025 is the corresponding provision. Earlier-year matters may continue to require the 1961 Act under the transition and savings rules.
Official sources
Section 165 - Income Tax Department | Income-tax Act, 2025 | 2025 Act resources and transition guidance.
Updated: 27 October 2026. This article provides general legal information. The applicable assessment year, trust deed, income classification and statutory conditions must be examined in individual cases.