As per section 61 of the Income Tax Act, if an asset is transferred under a ‘revocable transfer’ then the income arising from such asset is taxable in the hands of the transferor. The purpose of such kind of transfer includes any trust settlement, covenant, agreement or arrangement.

When a transfer is considered Revocable

As per section 63 of the Income Tax Act, a transfer for the purpose of sections 60, 61 and 62 shall be deemed to be revocable if:

Such transfer is containing any provision for re-transfer of the whole or any part of the income or assets (directly or indirectly) to the transferor, during the lifetime of the transferee or the beneficiary as the case may be, or

Such transfer gives transferor a right to re-assume the power over the whole or any part of the income or assets (directly or indirectly) during the lifetime of the transferee or the beneficiary as the case may be.

Section 61 will not be applicable if the transfer is Irrevocable for a specified period:

As per section 62(1) of the Income Tax Act, the provisions of revocable transfer contained under section 61, shall not be applicable in certain circumstances. Such circumstances are—

1. Where the transfer is by way of trust and the transfer is not revocable during the lifetime of the beneficiary;

2. Where the transfer is for any other reason and the transfer is not revocable during the lifetime of the transferee;

3. Where the transfer is made before 1.4.1961 and the transfer is not revocable for a period exceeding 6 years.

The abovementioned exceptions are applicable subject to the conditions that the transferor derives no benefit from such income whether directly or indirectly.

In the abovementioned cases, the income shall be deemed to be the income of transferee and will be taxed in his hands only.

Examples of Revocable Transfer with different situations:

In the following cases, a Transfer is a Revocable Transfer:

Cases Example
Case 1 – Where an asset is transferred by the way of trust and it is revocable during the lifetime of the beneficiary. Mr Ram transfers property to a trust for the benefit of Rahim and Shyam. However, Ram has a right to revoke the trust during the lifetime of Rahim and/or Shyam. This is a revocable transfer and any income arising from the transferred property is taxable in the hands of Ram.
Case 2 – Where an asset is transferred and it is revocable during the lifetime of transferee. Ram transfers a property to Shyam. However, Ram has a right to revoke such transfer during the lifetime of Shyam. This transfer is a revocable transfer and the income arising from such property is taxable in the hands of Ram.
Case 3 – Where an asset is transferred before 01.04.1961 and it is revocable within six years. Ram transfers an asset on 31.03.1961. The said transfer is revocable on or before 06.06.1963. This transfer is a revocable transfer. Income arising from such transferred asset is taxable in the hands of Ram.
Case 4 – Where the transfer contains any provision regarding re-transfer the asset or income to the transferor (directly or indirectly), wholly or partly. Ram transfers an asset to Shyam. The term of transfer is that on or after 1.04.1998 Ram can utilize the income of the asset for his benefit. However, he has not exercised this right as yet. On or after 01.04.1998, the income arising from the asset would be taxable in the hands of Ram, even if he has not exercised the aforesaid right.
Case 5 – Where the transferor has a right to re-assume the power over the whole or any part of the income or assets (directly or indirectly). Ram transfers an asset to Shyam. The terms of the transfer is that Ram can use the asset for the personal benefits of his family members whenever he wants. Till date, he has not exercised this right. Such transfer is a revocable transfer. The entire income arising from the asset would be taxable in the hands of Ram.

Also Read :-

S. No. Provisions of Set of and Carry Forward of Losses under Income Tax Act, 1961
1 Clubbing of Your Income with Income of your Spouse
2 Clubbing of income from assets transferred to Son’s Wife
3 Clubbing of income from the asset transferred to Spouse
4 Clubbing of Income on Revocable Transfer of Asset
5 Clubbing of remuneration income of Spouse from a Concern in which other Spouse has Substantial Interest
6 Set Off & Carry Forward of Loss under the head House Property
7 Clubbing of income of a Minor Child with Income of parent
8 Clubbing of Income from Self-acquired Property converted to Joint Family Property & subsequent Partition
9 Clubbing of Income from assets transferred to a person for benefit of spouse
10 Clubbing of Income from Assets Transferred to a Person for the Benefit of Son’s Wife
11 Carry forward & set off of Business Losses other than Speculation Loss
12 Set off and Carry Forward of Capital Loss
13 Set-off and carry forward of Speculative Business Loss
14 Set-off & carry forward of Loss from owning & maintaining racehorses
15 Set off and carry forward of losses of Specified Business | Section 73A

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