One of the most common question is with regard to the taxability of Association of Person (AOP). Whether the trust is eligible for basic exemption limit as is applicable to Individual? 

 

“Trust” is not separately mentioned in the definition of “person” in section 2(31) of the Income Tax Act-1961. Resultantly, trust is treated as an AOP only for the purpose of Income Tax Act-1961. Question equally arises about the the applicability of basic exemption limit to the such Trust.

 

The tax implication varies from trust to trust and the same is elaborated as under:

 

a] Taxability of the income of an AOP / BOI when the share of the members is unknown:

 

Relevant part is contained in Section 167 B (1) which provides that that when the individual share of the members of an AOP / BOI is indeterminate or unknown, then tax is leviable on the total income of the AOP / BOI at the maximum marginal rate.

 

However, there is proviso to this section which provides that where the total income of any member of such AOP / BOI is chargeable to tax at a rate which is higher than the maximum marginal rate, then the tax charged on the total of the income of the AOP / BOI will be at the higher rate.

 

b] Taxability of the income of an AOP / BOI when the share of members is known.

 

Relevant part is contained in Section 167B(2) which provides that where that the individual share of the members of an AOP / BOI is known or determinate then following two situations can arise:

i) Member’s income exceeds the maximum amount not chargeable to tax:

In such scenario, where the total income of any member exceeds the maximum amount which is not chargeable to tax, as per the Finance Act, of the relevant year then the tax shall be charged on the total income of the AOP / BOI at the maximum marginal rate

However in case the total income of any member of the AOP / BOI is chargeable to tax at a rate which is even higher than the maximum marginal rate, then on that portion of the total income of the AOP / BOI which is related to shares of such members, tax is chargeable at such higher rate & on the balance portion of the total income of AOP / BOI, it will be taxed at the maximum marginal rate.     

ii) Member income is less than the maximum amount not chargeable to tax:

In such scenario, where the total income of the member does not exceed the maximum amount not chargeable to tax as per the relevant applicable Finance Act then in such cases the AOP  or BOI will be taxed at a rate as applicable to individuals.