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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Tools for Estate Planning

Caselet: Mr. Anil Kapoor, a Hindu businessman, settles a private discretionary trust for his two adult children. He transfers Rs 2 crore of securities. He remains the trustee, and the deed lets him revoke the trust and take back the assets at any time. Which statement about the income tax treatment of the income from the securities is most appropriate under the Income-tax Act's provisions on revocable transfers?

The income is taxed in Mr. Kapoor's hands. Since the trust deed lets him revoke it and take back the assets, the revocable transfer clubbing provisions include the income from those securities in the transferor's total income, not the children's or the trust's.

  1. AIncome is taxed in the hands of the children since they are the beneficiaries
  2. BIncome is taxed in the hands of the trust at the maximum marginal rate irrespective of the revocability
  3. CIncome is taxed in the hands of Mr. Kapoor as the transferor because the transfer is revocableCorrect
  4. DIncome is exempt because trust income is never taxable

Explanation

Under the clubbing provisions for revocable transfers, income from assets transferred under a deed that allows the transferor to re-assume power over the assets is included in the transferor's income. Mr. Kapoor can take back the assets, so the income is clubbed with his. The children and trust are not taxed on it, and trust income is not exempt.

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