Revocable trust
A trust the settlor can revoke at his discretion or with the beneficiaries' consent. Income from a revocable transfer is taxed as the transferor's, so an AIF set up this way gets no pass-through.
In plain language
A trust has three parties: the settlor, who transfers the property; the trustee, who receives it; and the beneficiary, for whose benefit the trust exists. Most Category III AIFs are set up as trusts.
A revocable trust is one the settlor can undo, either at his own discretion or with the consent of the beneficiaries. An AIF structured as a revocable trust may be revoked at any time before its tenure is complete.
That power matters for tax. If the person who put the assets in can take them — or their income — back, the tax law treats the income as still belonging to that person. So the trust cannot be a pass-through for its investors. The opposite structure, the irrevocable trust, is where the settlor has no power to revoke and the trust runs until its purpose is served or its tenure ends.
How it works
When is a transfer revocable? The workbook says a transfer of an asset is revocable when the contribution agreement contains a provision for:
- the re-transfer, directly or indirectly, of the income from the asset to the transferor; or
- a right for the transferor to reassume power, directly or indirectly, over the whole or any part of the income or asset.
How much power is enough? As long as a power to revoke exists with the settlor, the manner of revocation is not considered. Even partial revocation counts as a power to revoke, making the trust revocable.
When is an AIF irrevocable? When the fund will not be revoked by (a) the consent of all the beneficiaries, or (b) the settlor, exercising a power of revocation expressly reserved for him.
Tax consequence. Under Section 61 of the Income Tax Act, 1961, all income arising from a revocable transfer of assets is chargeable as the income of the transferor and included in his total income. An AIF set up as a revocable trust therefore gets no tax pass-through. Only for an irrevocable transfer does the next question — determinate or indeterminate — arise.
Figure 9.1 in the workbook:
| Structure | Tax regime |
|---|---|
| Revocable trust | Gross total income — no tax pass-through |
| Irrevocable determinate trust | Business income at MMR; other income passes through |
| Indeterminate trust | Taxable at MMR |
A worked example
Illustrative figures. Mr Shah settles a trust that runs a Category III AIF scheme. In a year the scheme earns Rs 1 crore: Rs 80 lakh of capital gains and Rs 20 lakh of business income from derivatives.
Version 1 — revocable. The contribution agreement lets Mr Shah reassume power over part of the income. That partial power is enough.
Section 61: whole Rs 1,00,00,000 → included in Mr Shah's total income
Pass-through to unit holders: none
Version 2 — irrevocable and determinate.
Business income Rs 20,00,000 → taxed at MMR, paid by the trustee
Capital gains Rs 80,00,000 → passes through; taxed at the unit holders'
applicable rates
Version 3 — irrevocable but indeterminate.
Rs 1,00,00,000 → taxed at MMR in the trustee's hands (Section 164)
Same fund, same Rs 1 crore of income, three different answers — decided entirely by the drafting of the trust deed and contribution agreement.
Why NISM asks about it
Chapter 9 (Taxation), section 9.2.2 Revocable Trust vs. Irrevocable Trust covers this, and Figure 9.1 combines it with determinacy into the decision tree the questions are built from. Chapter 9's first sample question asks which trust structure can pass through capital gains to investors — the answer is the determinate irrevocable trust, and both revocable options are the distractors. Expect questions on what makes a transfer revocable, whether partial revocation counts, and which section taxes the income in the transferor's hands.
Common exam traps
- Partial revocation is still revocation. Any retained power to revoke makes the trust revocable; the manner of revocation is irrelevant.
- Revocability defeats pass-through on everything, whether the trust is determinate or not.
- Revocable income is taxed as the transferor's, not at MMR in the trustee's hands — that is the indeterminate-trust outcome.
- Determinacy is checked only for irrevocable transfers.
- The two routes to revocation are the beneficiaries' consent and a power expressly reserved for the settlor.
- The workbook contradicts itself on why trusts are used. Chapter 9 opens by saying most AIFs are set up as trusts to get tax pass-through, yet also says Section 115UB pass-through is not available to Category III AIFs, which are taxed at MMR in the fund's hands. Read the first statement as historical (before the Finance Act, 2015) and about trust law generally.
- Stale reference. The workbook cites Section 61 of the Income Tax Act, 1961. The Income-tax Act, 2025 replaced that Act with effect from 1 April 2026, with different section numbers. Learn the workbook's numbering for the exam.
Check yourself
1.Which trust structure is eligible to pass through income in the nature of Capital Gains to its investors?
- a)Determinate Irrevocable Trust
- b)Determinate Revocable Trust
- c)Indeterminate Irrevocable Trust
- d)Indeterminate Revocable Trust
Show the answer
Answer: (a) Determinate Irrevocable Trust
This is the workbook's own sample question. Both conditions must hold. Revocability triggers Section 61, under which all income arising by virtue of a revocable transfer shall be chargeable to tax as the income of the transferor, so no pass-through is available. Indeterminacy triggers Section 164, under which the trustee pays income tax at the Maximum Marginal Rate and, since the beneficiaries are not known, Section 166 will not be invoked and no income will be taxed in the hands of the unit holders. Only a determinate irrevocable trust passes capital gains through.
Where this is taught
- Series XIX-B · Chapter 9: Taxationintroduced here
- Series X-B · Chapter 15: Tools for Estate Planningintroduced here
Related terms
- Determinate trustA trust whose beneficiaries and their beneficial interests are ascertainable from the trust deed throughout its life — the structure that lets a Category III AIF avoid MMR on non-business income.
- Irrevocable trustA trust whose settlor cannot take the property back, which is why the workbook records that it is protected from the settlor's bankruptcy and usable to secure the interests of dependents.
- TrustA legal arrangement in which property is transferred to trustees, who hold legal title and control it for identified beneficiaries on terms set out in a trust deed.
- Indeterminate TrustA trust whose beneficiaries and their beneficial interests cannot be ascertained from the trust deed. For an AIF, the trustee is taxed on the whole income at the maximum marginal rate under Section 164.
- SettlorThe party who brings an AIF trust into existence — executing the trust deed with the trustee and conveying the initial sum that becomes the trust's first asset.
- Maximum Marginal RateThe highest slab rate of income tax, applied to a Category III AIF's business income at fund level because the fund gets no pass-through — 30% before surcharge and cess.
- Representative AssesseeThe capacity in which the trustee of an AIF set up as a trust is assessed to income tax under Sections 161 and 164 — paying on behalf of the beneficiaries so the same income is not taxed twice.
- Revocable transferA transfer to a trust whose document lets the transferor get back the income or asset, or reassume power over it; income from it is taxed in the transferor's hands under sections 97 and 98 of the ITA.
- Testamentary trustA trust created through a Will, which takes effect on the death of the settlor - it is subject to the rulings under the Will and therefore goes through probate, but attracts no stamp duty and no capital gains.
- Trust perpetuitiesThe rule that a trust cannot last for ever: Indian law caps the period within which gifts in a trust must vest, and limits the accumulation of trust income to the transferor's lifetime or 18 years.