Follow ownership and retained powers, not the bank destination
For tax year 2026–27, section 96 of the Income-tax Act, 2025 includes income with the transferor where income is transferred without transferring the asset that produces it. The rule applies whether the income transfer is revocable or not. A direction to pay interest to another person does not by itself transfer the deposit or shift the income-tax burden.
Asset transfers require a second test
Sections 97 and 98 in the Act as amended by Finance Act, 2026 address revocable transfers of assets. Income arising by virtue of such a transfer is included with the transferor. For these provisions, transfer includes a settlement, trust, covenant, agreement or arrangement. Revocability includes a provision for direct or indirect retransfer of income or assets, or a right to reassume power over them. An instrument labelled irrevocable therefore needs a clause-by-clause review; the title alone does not settle the result.
Apply both conditions of the lifetime exception
Section 97(2) requires, for a trust, that the transfer is not revocable during the beneficiary’s lifetime; for another transfer, during the transferee’s lifetime. It also requires that the transferor derive no direct or indirect benefit from the income. Both conditions matter. A fixed lock-in is not automatically equivalent to a lifetime restriction. Section 97(3) restores attribution as and when the power to revoke arises, so retain the relevant date and income-accrual evidence.
Do not turn an attribution exception into a blanket tax exemption
Failure of section 97(1) to apply by reason of its exception does not certify that income is exempt or that section 99, trust taxation, beneficial ownership or another rule cannot apply. Likewise, an income-only assignment must first pass section 96; it is unsafe to use an irrevocability argument about an arrangement that never transferred the source asset. This article does not decide disputed overriding-title questions or the legal validity of a particular trust.
Build a source and computation schedule
Identify the legal asset, transferor, recipient, governing document, retained benefits, revocation powers and income arising during the relevant period. Compute income under its proper head and then perform attribution without duplicating it. Bank credits and bookkeeping descriptions are evidence, but cannot replace the operative terms. The examples assume genuine documents, established ownership and the stated computed income; they do not calculate final slab tax, surcharge, cess, deductions or TDS-credit entitlement.
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Part of the income assigned
An owner retains the income-producing asset. Computed annual income is ₹1,80,000; an income-only assignment directs ₹60,000 to another person and the owner receives ₹1,20,000. The section 96 working attributes the full ₹1,80,000 to the transferor, not only the bank credit retained personally.
Illustrative example 2: Interest paid elsewhere
A retained deposit of ₹5,00,000 earns a fictional 8% annual simple interest, or ₹40,000. A direction sends ₹30,000 of that income to another person. On these income-only facts, transferor attribution is ₹40,000, comprising ₹30,000 directed away and ₹10,000 retained.
Illustrative example 3: Revocable asset settlement
An asset worth ₹20,00,000 is transferred through a settlement that falls within section 98’s revocability definition. It earns a stated 6% simple annual return of ₹1,20,000. Assuming section 97(2) does not apply, ₹1,20,000 is included with the transferor under section 97(1), rather than treating the settlement’s asset value as annual income.
Illustrative example 4: Lifetime exception established
A qualifying trust earns computed income ₹90,000. Assume the transfer cannot be revoked during the beneficiary’s lifetime and the transferor derives no direct or indirect income benefit. The section 97(1) attribution in this model is zero. The ₹90,000 still requires separate analysis in the proper taxpayer’s hands and under other applicable provisions.
Illustrative example 5: One exception condition fails
A lifetime-nonrevocable arrangement earns ₹1,00,000, but the transferor derives a documented indirect benefit from that income. The no-benefit condition fails. Assuming the transfer is otherwise within section 97(1), the model attributes ₹1,00,000, not merely the ₹20,000 illustrative benefit received. Actual classification must follow the document and facts.
Illustrative example 6: Revocation power arises later
Assume the lifetime-exception treatment lawfully applied before a power to revoke arose on 1 October 2026. The records separately establish income of ₹30,000 arising before that date and ₹30,000 after it. Section 97(3)’s post-trigger attribution model is ₹30,000. This is based on evidenced accrual, not a universal rule that every annual receipt is split equally by months.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the applicable year | Use the Act governing the income period. |
| 2 | Identify the source asset | Record ownership before and after the arrangement. |
| 3 | Separate income-only transfers | Test section 96 before relying on an asset-transfer exception. |
| 4 | Read all operative terms | Include side arrangements, trusts and indirect rights. |
| 5 | Identify retained powers | Test retransfer and reassumption provisions under section 98. |
| 6 | Test the lifetime restriction | Distinguish trusts and other transfers. |
| 7 | Test income benefit | Document absence or presence of direct and indirect benefit. |
| 8 | Track revocation dates | Link powers arising to actual income-accrual records. |
| 9 | Compute and attribute income | Separate asset principal from annual income and avoid duplication. |
| 10 | Review other provisions | Check section 99, trust treatment and tax-credit rules independently. |
Sixteen practitioner FAQs
1. Can paying income into another account shift tax automatically?
No. Identify the source asset and the operative attribution rules.
2. Does section 96 require a revocable assignment?
No. Its income-only rule applies whether revocable or not.
3. What if the source asset never moved?
Section 96 is the first attribution test, subject to the actual facts.
4. Does a revocable asset transfer have a separate rule?
Yes. Section 97(1) generally includes its income with the transferor.
5. Is transfer limited to a registered conveyance?
Section 98 includes settlements, trusts, covenants, agreements and arrangements for these purposes.
6. Does an irrevocable label decide everything?
No. Review retained powers and the statutory definition.
7. Can indirect retransfer clauses matter?
Yes. Section 98 expressly includes direct and indirect features.
8. What lifetime matters for a trust exception?
The beneficiary’s lifetime under section 97(2)(a).
9. What lifetime matters for another transfer?
The transferee’s lifetime under that provision.
10. Is a lifetime restriction the only condition?
No. The transferor must also derive no direct or indirect benefit from the income.
11. Does any fixed-term lock-in prove the lifetime exception?
No. Compare actual terms with the statutory condition.
12. What if the power to revoke later arises?
Section 97(3) brings income within the stated attribution as and when that power arises.
13. Does the exception itself make income tax-free?
No. Determine the proper taxpayer and all other applicable rules.
14. Is the transferred principal annual taxable income under these examples?
No. The computations distinguish the asset principal from income arising from it.
15. Can section 99 still need review?
Yes. Family-relationship and other attribution provisions remain separate tests.
16. Does the article determine TDS-credit entitlement?
No. Verify that under its applicable rules after determining income attribution.
Conclusion
Changing the recipient of income may leave tax with the transferor. Separate income-only assignments from asset transfers, inspect retained powers and test the statutory lifetime exception.