Decoding Maximum Marginal Rate Under the Income-tax Act
Dr. Vinod K. Singhania Leader | Taxmann’s Advisory & Research
CA Ashish Gupta Deputy Manager | Taxmann’s Advisory & Research
Decoding Maximum Marginal Rate Under the Income-tax Act
Dr. Vinod K. Singhania Leader | Taxmann’s Advisory & Research
CA Ashish Gupta Deputy Manager | Taxmann’s Advisory & Research
1. Introduction
Under the Income-tax Act, certain categories of income are taxed at the Maximum Marginal Rate (MMR) rather than the normal slab rates or other rates otherwise applicable to the assessee. The concept of MMR was introduced as an anti-avoidance measure to discourage high-income taxpayers from reducing their tax burden by distributing income among multiple entities, such as private trusts, Associations of Persons (AOPs), or Bodies of Individuals (BOIs), that might otherwise be eligible for lower tax rates.
By taxing such income at the MMR, the Act seeks to ensure tax neutrality and discourage tax avoidance, particularly in cases where the shares of beneficiaries or members are indeterminate or where the legislature considers taxation at the highest rate appropriate.
The provisions relating to MMR apply to specified entities and circumstances, including certain trusts, AOPs/BOIs, business trusts, Alternative Investment Funds (AIFs), and registered Non-Profit Organisations (NPOs). The table below summarises the principal provisions under which income is chargeable to tax at the MMR.
Section Description
223 of the ITA 2025 (115UA of the ITA 1961)
224 of the ITA 2025 (115UB of the ITA 1961)
307 of the ITA 2025 (164 of the ITA 1961)
308 of the ITA 2025 (164A of the ITA 1961)
309 of the ITA 2025 (167B of the ITA 1961)
Income of a business trust, other than capital gains covered under Sections 196, 197 and 198 of the ITA 2025 (corresponding to Sections 111A, 112 and 112A of the ITA 1961), is taxable at MMR.
Business income of a Category-I or Category-II Alternative Investment Fund (AIF) that is not registered as a company or firm is taxable at the MMR.
Income of a private discretionary trust is taxable at the MMR where the beneficiaries’ shares are indeterminate.
Income of an oral trust is taxed at the MMR.
Income of an AOP or BOI is taxable at the MMR where the members’ shares are indeterminate or unknown. Income of an AOP or BOI is also taxable at the MMR where the members’ shares are determinate, but the total income of any member (excluding the member’s share from the AOP or BOI) exceeds the basic exemption limit.
352 of the ITA 2025 (115TD of the ITA 1961)
The accreted income of an NPO registered under Chapter XVII-B of the ITA 2025 (corresponding to Section 12AA or Section 12AB of the ITA 1961) is taxable at the MMR if the NPO converts into a non-charitable organisation, merges with a non-charitable organisation, or transfers its assets on dissolution to a non-charitable organisation.
Note – Under the ITA 1961, Section 161 provides that profits and gains from the business of a private trust are taxable at the MMR, except where the trust is declared by will exclusively for the benefit of a relative dependent on the settlor for support and maintenance and is the only such trust declared by him. This provision is no longer available under the ITA 2025.
2. Definition of MMR
Section 2(70) of the ITA 2025 (corresponding to Section 2(29C) of the ITA 1961) defines the term MMR as the income tax rate (including surcharge on income tax) applicable to the highest slab of income for an individual, AOP, or BOI, as specified in the Finance Act for the relevant year.
3. Computation of MMR
The new tax regime was introduced under Section 115BAC of the Income-tax Act, 1961, and continues under Section 202 of the ITA 2025 with substantially similar provisions and conditions. From Assessment Year 2024-25 onwards, the new tax regime became the default tax regime for individuals, HUFs, AOPs, BOIs and Artificial Juridical Persons (AJPs). This has repeatedly raised a question about the MMR during return filing, namely, whether it should be 39% or 42.744%, which is calculated as follows:
Note – The surcharge rate differs significantly between the old and new tax regimes. Under the old regime, the surcharge is levied at four rates, with the maximum rate of 37% applying when total income exceeds Rs. 5 crore. In contrast, under the new regime, the surcharge has been streamlined and capped at 25%.
Note – The surcharge rate is capped at 15% for an AOP comprising only companies as its members, resulting in an MMR of 35.88% (30% + 15% surcharge + 4% cess). Consequently, such an AOP may be subject to an MMR lower than the generally applicable rate of 39%.
4. Applicable MMR
From the foregoing discussion, it follows that the applicable MMR depends on the tax regime applicable to the concerned entity. Since the new tax regime is the default regime, the MMR would ordinarily be 39%. A higher rate would apply only where specifically mandated by law.
For example, Section 311 of the ITA 2025 (corresponding to Section 167B of the ITA 1961) creates an exception to the general rule applicable to AOPs and BOIs. The provision
provides that where any member is chargeable to tax at a rate higher than the MMR applicable to the AOP or BOI, the relevant income of the AOP or BOI shall be taxed at that higher rate.
Accordingly, if a member is chargeable to tax at 42.744% under the old tax regime, the relevant income of the AOP or BOI will also be chargeable to tax at 42.744% and not at 39%.
5. Conclusion
The Maximum Marginal Rate is 39% under the default tax regime and rises to 42.744% only when the old tax regime applies. In the case of an AOP or BOI, if any member is chargeable to tax at 42.744% under the old tax regime, the relevant income of the AOP or BOI may also be taxed at that higher rate, even if the AOP or BOI itself is otherwise taxable under the default regime. Therefore, before determining whether the effective rate is 39% or 42.744%, taxpayers should first identify the applicable tax regime and the relevant surcharge threshold.
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