The trustee is taxed for the beneficiary
An Indian private trust is not taxed as a separate person in its own right; instead the trustee is a representative assessee. Under Section 160 the trustee of a trust declared by a written instrument is treated as a representative assessee for the beneficiaries' income, and under Section 161 is assessed on that income in like manner and to the same extent as the beneficiaries would be. So the trustee stands in the beneficiaries' shoes for tax, assessed in the trustee's own name but in that representative capacity.
What that means in practice depends entirely on how the trust is written, and this is where families win or lose. The tax law draws a sharp line between a specific trust, where the beneficiaries and their shares are fixed and known, and a discretionary trust, where the trustee decides who gets how much. The two are taxed very differently, so the drafting is not a formality.
Specific versus discretionary, and the rate
In a specific trust, the trustee is taxed on each beneficiary's share at that beneficiary's own rate, as if the beneficiary had received the income directly. So your share as an NRI beneficiary is taxed at your rates, with your slab and, importantly, the ability to apply the relevant tax treaty to your portion, for instance a lower treaty rate on Indian dividends or interest flowing through the trust. This is the beneficiary-friendly structure.
A discretionary trust is treated more harshly. Because the shares are not fixed, Section 164 generally taxes the whole income in the trustee's hands at the maximum marginal rate, the top rate of tax, regardless of who the beneficiaries are or how modest their means. There are important carve-outs, a trust created by a will, and being the only such trust, can be taxed at ordinary rates rather than the top rate, while a trust with business income is pushed the other way, taxed in full at the top rate. So the label matters: a family aiming for their NRI members to be taxed at their own rates wants a properly specific trust, not a discretionary one.
The trust as a succession tool for an NRI
Used well, an Indian specific trust is a clean way to hold Indian family assets for NRI beneficiaries, income taxed at each beneficiary's rate, the assets held together and passed on without the friction of probate, and the arrangement continuing across a move abroad. It is a common alternative to leaving everything to a will.
There is a procedural point worth knowing. Under Section 166, the tax office is not confined to taxing the trustee; it can instead assess the beneficiary directly on their share, though not both for the same income. In practice departments often assess the trustee for convenience, and the direct-beneficiary route is the taxpayer's counter where it gives a better result, for example to let an NRI beneficiary apply a treaty rate on their share. A practising CA sets the trust up as a specific trust where that is the goal, files the trustee's return correctly, and applies each NRI beneficiary's own rate and treaty position.