NISM-Series-X-B: Investment Adviser (Level 2) · Tax Provisions for Special Cases

Taxation of Trusts and AOP/BOI in India

Updated 11 October 2026 · Fact-checked

A trustee is taxed as representative assessee. For a specific trust, tax is levied on the trustee in the same way and to the same extent as on each beneficiary. A discretionary trust, or an AOP/BOI with indeterminate shares, is taxed at the maximum marginal rate. A revocable trust's income is taxed in the settlor's hands.

Understand Taxation of Trusts and AOP/BOI

A trust is an arrangement where a settlor hands over property to a trustee, who holds and manages it for beneficiaries. Trusts are common in estate planning. The tax question is simple: who pays tax on the trust's income, and at what rate?

First, check whether the trust is revocable. If the settlor can take back the property or income, the law treats the settlor as still owning it. The income is then taxed in the settlor's hands, not the trust's. This is an anti-avoidance rule.

If the trust is irrevocable, the trustee is the representative assessee. This means the trustee files the return and pays the tax on behalf of the beneficiaries. The rate then depends on the type of trust. In a specific (determinate) trust, the beneficiaries and their shares are known. The trustee is taxed in like manner and to the same extent as each beneficiary would be. So each share is taxed at that beneficiary's slab rates, and the beneficiary's basic exemption is respected.

In a discretionary trust, the trustee decides who gets what, so shares are indeterminate or unknown. The income is taxed at the maximum marginal rate (MMR). MMR is the highest rate on the top slab, and it includes the applicable surcharge and 4% health and education cess. There are limited exceptions, such as certain trusts created by will for dependants, so read the question's facts.

An AOP (association of persons) is a group that joins together with a common purpose to earn income. A BOI (body of individuals) is a group of individuals doing the same. Both are separate taxable persons. If members' shares are indeterminate or unknown, the AOP/BOI is taxed at MMR. If shares are determinate, it is taxed at slab rates, unless any member has other income above the basic exemption limit. In that case MMR applies to the AOP/BOI's income. Members are generally not taxed again on their share of income that the AOP/BOI has already been taxed on.

Key formulas to remember

Revocable trust: Income of revocable trust → taxed in the settlor's hands; Applies where the settlor can re-assume power over the income or assets. Test this first.
Specific trust: Trustee taxed as representative assessee, in like manner and to the same extent as each beneficiary; Beneficiaries and their shares are known. Each share is taxed at that beneficiary's rates.
Discretionary trust: Tax = Trust income × MMR (including surcharge and cess); Shares indeterminate or unknown. Section 164 deals with this. Limited exceptions exist, e.g. certain trusts created by will for dependants.
MMR: MMR = highest slab rate (30%) + applicable surcharge + 4% cess; Surcharge depends on income level and regime, so use the rate given in the question.
AOP/BOI, shares indeterminate or unknown: Tax at MMR on total income; Applies to both AOPs and BOIs.
AOP/BOI, shares determinate: Slab rates; but if any member's other income exceeds the basic exemption limit → MMR on AOP/BOI income; The member test uses the member's income excluding the share from the AOP/BOI.
Member's share: Share of income already taxed in the AOP/BOI → not taxed again in the member's hands (generally); Avoids double taxation. Check the exact relief only if the question gives rates.

How to solve Taxation of Trusts and AOP/BOI questions

Use the same decision path for every trust or AOP/BOI question. It tells you who is taxed and at which rate.

1Identify the entity: trust, AOP or BOI. Note whether it is a private trust or a charitable or religious one. Charitable trusts follow different exemption rules.
2For a trust, ask if it is revocable. If yes, the income goes to the settlor and you stop.
3If irrevocable, note that the trustee is the representative assessee and files the return.
4Check whether the beneficiaries and their shares are determinate. If yes, it is a specific trust. If not, it is discretionary.
5Specific trust: tax each beneficiary's share at that beneficiary's rates. Discretionary trust: apply MMR to the income, after checking for any stated exception.
6For an AOP/BOI, check whether shares are determinate. If indeterminate, apply MMR. If determinate, check whether any member has other income above the basic exemption limit. If yes, MMR. If no, slab rates.
7Compute tax using the rate and cess stated in the question, and treat the members' share as not taxed again.

Quickest way: Three-question filter

When to use it: Use it for MCQs that ask which rate applies or who is taxed.

Can the settlor take it back? Revocable means the settlor pays.
Are the shares known? Known means beneficiary rates (trust) or slab rates (AOP/BOI). Unknown means MMR.
For an AOP/BOI with known shares, does any member have other income above the exemption limit? If yes, MMR.
Pick the option that matches. Reject options that tax the beneficiary at MMR or the settlor of an irrevocable trust.

Common mistakes in Taxation of Trusts and AOP/BOI

Applying MMR to every trust.
Students remember 'trust = MMR' and stop reading.
Fix: MMR is for discretionary trusts. A specific trust is taxed like its beneficiaries.
Taxing the beneficiary instead of the trustee in a specific trust.
The rates are the beneficiary's, so it feels like the beneficiary pays.
Fix: The trustee is the representative assessee and is assessed. The beneficiary's rates and exemption are used.
Ignoring revocability.
Students jump to specific versus discretionary.
Fix: Always test revocability first. Revocable trust income is taxed in the settlor's hands.
Taxing a determinate-share AOP at slab rates without checking its members.
Students forget the member-income test.
Fix: If any member's other income exceeds the basic exemption limit, MMR applies to the AOP/BOI.
Treating AOP and BOI differently on rates.
The names suggest different rules.
Fix: The rate rules are the same. The difference is in who the members are: an AOP can include non-individuals, while a BOI is a body of individuals.
Leaving out surcharge and cess from MMR.
Students quote 30% as the answer.
Fix: MMR includes applicable surcharge and 4% cess. If the question gives a rate, use it as given.

Worked examples

Example 1

A discretionary trust earns income of ₹10,00,000 in a year. The question states that the MMR, including surcharge and cess, is 31.2%. The trust has no exceptional features. What is the tax payable? Options: (a) ₹3,00,000 (b) ₹3,12,000 (c) ₹1,25,000 (d) ₹2,50,000

Show the solution

The trust is discretionary: shares are indeterminate. So MMR applies to the whole income.
The stated MMR including cess is 31.2%.
Tax = 10,00,000 × 31.2% = ₹3,12,000.
Option (a) uses 30% and forgets cess. Options (c) and (d) apply low slab-type rates that do not suit a discretionary trust.

Answer: (b) ₹3,12,000

Example 2

An AOP has three members with determinate, equal shares. One member has other income of ₹8,00,000 from salary, which is above the basic exemption limit. The AOP earns ₹5,00,000. At what rate is the AOP taxed, and is the members' share taxed again?

Show the solution

Shares are determinate, so you check the member-income test.
One member's other income (₹8,00,000) exceeds the basic exemption limit.
So the AOP's total income is taxed at MMR, not at ordinary slab rates.
The AOP has already paid tax on the income, so the members' share of it is generally not taxed again in their hands.

Answer: MMR applies to the AOP's income. Members' shares are generally not taxed again.

Exam tips

Revocable versus irrevocable is a frequent first filter. Read the settlor's powers carefully.
Watch for the words 'determinate' and 'indeterminate'. They decide the rate.
If the question gives an MMR figure, use it directly. Do not add your own surcharge or cess.
The trustee is always the representative assessee. Reject options saying the trust itself pays through the beneficiary.
Negative marking is 25% of the question's marks. If you can eliminate two options, answer. If the question is blank for you, skipping is safer.

Practice questions from Tax Provisions for Special Cases

Taxation of Trusts and AOP/BOI in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalTaxation of Private Trusts and Specific Trusts

Taxation of Trusts and AOP/BOI: frequently asked questions

What is the difference between a specific trust and a discretionary trust for tax?

In a specific trust, beneficiaries and their shares are known, so the trustee is taxed like each beneficiary. In a discretionary trust, shares are indeterminate or unknown, so income is taxed at the maximum marginal rate.

Who pays tax on a revocable trust?

The settlor. If the settlor can take back the property or income, the income is taxed in the settlor's hands and not in the trust's.

How are AOP and BOI taxed in India?

They are taxed as separate persons. If member shares are indeterminate or unknown, MMR applies. If shares are determinate, slab rates apply unless any member has other income above the basic exemption limit, in which case MMR applies.

What is the maximum marginal rate for a trust?

It is the highest slab rate of 30%, plus applicable surcharge and 4% health and education cess. The exact effective figure depends on income level and regime, so use the rate given in the question.