1. Charitable Trusts – A brief Introduction
“The word ‘Charity’ connotes altruism in thought and action. It involves an idea of benefiting others rather than oneself” Supreme Court in the case Andhra Chamber of Commerce  55 ITR 722 (SC). It is a voluntary help either in money/kind to the needy. Collective efforts are always more fruitful and hence there are various Non-Governmental Organizations (NGOs) and non-profit entities constantly working on charitable activities by raising funds all over the world by forming either an institution or trust.
Efforts of such institutions play a significant role in promoting economic development and social welfare objectives of Government. Need for such organisations along with Government’s efforts cannot be ruled out, not because Government lacks funds but due to such institution’s outreach and more localised approach which ensures identification of needy in the nook and corner and extending a supporting hand.
This calls for incentives to these institutions and more specifically tax incentives to genuine charitable institutions from tax administrations of any country whether developed or developing to encourage such activities. Indian Government too is not left behind in utilising such institutions for societal benefits and has provided various tax incentives/exemptions to charitable institutions. In this article, we discuss income tax provisions relating to charitable institutions/trust and the exemptions they enjoy.
2. Income tax on Charitable Institution or Trust
We have discussed below income tax on various categories of income of charitable trust:
|Category of income||Income subject to tax||Taxability|
|Donations/voluntary contributions||Voluntary contributions with a specific direction to form part of corpus of trust or institution||Exempt*|
|Voluntary contribution without such specific direction||Forms part of income from property held under trust|
|Anonymous donations i.e., donations where donee does not maintain record of identity/any particulars of the donor||Donation exceeding higher of: |
i) 5% of total donations received by trust or
ii) Rs 1,00,000
|Taxed at 30%|
|Anonymous donation received by trust established wholly for religious and charitable purpose on||Taxable in the same manner as voluntary contributions (without specific direction) as above|
|Income from property held under trust for charitable or religious purpose||Income applied for charitable or religious purpose in India||Exempt*|
|Income accumulated or set aside for the application towards charitable or religious purpose in India||Exempt* to the extent of 15% of such income. This means at-least 85% of income from property to be applied for charitable and religious purpose in India as above and balance 15% can be accumulated or set aside. [See below comment on 85%]|
|Income from property held under trust created for charitable purpose which tends to promote international welfare in which India is interested||CBDT either by general or special order has directed that such income shall not be included in the total income of trust||Exempt*|
|Capital gain from asset held under trust in whole||Net consideration is utilised fully for acquiring another capital asset||Entire capital gain is deemed to have been applied for charitable and religious purpose and hence is exempt*|
|Net consideration is utilised partially for acquiring another capital asset||Capital gain utilised in excess of cost of old asset transferred is considered to have been applied for charitable and religious purpose and is exempt*|
*Only Charitable/ religious trust or institution registered under Section 12AA enjoys the exemption
3. How should income be applied to be exempt
In order to be exempt, trust is required to apply at-least 85% of its income to charitable or religious purpose in India. As per the definition provided under tax provisions, charitable purpose includes the following:
- Relief of the poor
- Medical relief
- Preservation of environment (monuments or places or objects of artistic or historic interest
- Advancement of any other object of general public utility. However, if any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration is not considered to be for charitable purpose irrespective of the nature of use or application, or retention, of the income from such activity unless:
- such activity of trade/commerce/business is undertaken in the course of actual carrying out of such advancement of any other object of general public utility;and
- the aggregate receipts from such activity/ activities during the financial year does not exceed 20% of the total receipts, of the trust or institution undertaking such activity/activities, of that financial years
In addition, income utilised for purchase of capital asset, repayment of loan for purchase of capital asset, revenue expenditure and donation to trust registered under Section 12AA and Section 10(23C) shall also be treated as applied for charitable purpose and be exempt from tax.
The expression religious purpose has not been defined under the Act. Religious purposes are necessarily associated with religion. A religion is certainly a matter of faith with individuals or communities. ‘Religious Purpose’ includes the advancement, support or propagation of a religion and its tenets. The income of a religious trust or institution is entitled to exemption even though it may be for the benefit of a particular religious community or caste. The exemption u/s 11 available to public religious trusts only; and not available to trust for private religious purposes which does not tenure for the benefit of the public.
4. What if 85% of income is not applied?
If trust or institution is unable to apply 85% of its income from property held under trust, the income is still exempt if
- The income is deemed to have been applied for charitable purposes in specified scenarios
- 85% of income is neither applied not deemed to have been applied, the trust is allowed to accumulate such unapplied portion of income under specified conditions to claim the exemption.
Let us understand the 2 scenarios a little more in detail
Where the income applied to charitable or religious purposes falls short of 85% of the income derived during the previous year because –
- the whole or any part of the income has not been received during the previous year; or
- for any other reason;
the assessee has an option to:
- apply such income referred to in clause (i) for such purposes during the previous year in which it is received or during the previous year immediately following the said previous year;
- apply such income referred to in clause (ii) for such purposes during the previous year immediately following the previous year in which the income was derived.
Such option is to be exercised in Form 9A to be furnished electronically with or without digital signature by the trust within the time allowed for filing return of income u/s 139(1).
b) Accumulation of 85% of income of trust
Where at-least 85% of income of trust or institution has not applied/ deemed to have been applied as above, it is allowed to accumulate or set aside the same and such income shall be exempt if following conditions are satisfied:
- Such trust or institution furnishes Form No. 10 – notice of accumulation of income by charitable trust or institution electronically on or before due date for filing the return of income;
- Purpose for which income is being accumulated or set aside shall be mentioned;
- Income shall not be accumulated for more than 5 years and years in which income accumulated or set aside due to order or injunction of any court to be excluded in computing 5 years; and
- Money so accumulated or set aside is invested or deposited in specified mode.
However, if income is not accumulated as above, it is taxable as follows:
|Category of violation||Year of taxation|
|If income is applied for purpose other than charitable or religious||Year of such application|
|Income ceases to be invested as specified||Year in which it ceases to be invested as specified|
|Not utilised for the purpose for which it was accumulated or set aside upto 6 years||6th year|
|Donated to trust registered under Section 12AA or 10(23C)||Year in which income is so donated|
5. Where should accumulated income be invested?
As mentioned already, income not exceeding 15% can be accumulated or set aside for its application in India. Further, even the 85% of income which is not applied for specified purpose can also be accumulated or set aside for its application in India. Such accumulation must be through following modes of investment:
- Investment in government saving certificate/UTI
- Deposit in post office savings bank/scheduled bank/co-operative bank
- Investment in immovable property
- Investment in any security for money created and issued by the Central or State Government
- Company debentures fully and unconditionally guaranteed by Central or State Government
- Investment or deposit in public sector company
- Deposit with or investment in bonds of a financial corporation / public company (registered in India) engaged in providing long term finance for industrial development in India or having main object of providing long term finance for urban infrastructure/residential house, in India respectively
6. Exemption, not to apply in certain cases
No exemption is available to the following incomes of trust/institution:
- Entire income from property held under trust for private religious purpose which does not benefit the public
- Entire income of charitable Trust or institution established for the direct of indirect benefit of any particular religious community or caste
- Entire income If income (wholly or partly) and property of the charitable or religious trust or institution is used for the benefit of specified person**
- Income of charitable / religious trust is not invested as specified
- Value of medical or educational services made available by any charitable or religious trust running a hospital medical institution or educational institution to specified person**
- Any income being profits and gains of business unless business is incidental to the attainment of the objectives of the trust / institution and separate books of account are maintained in respect of such business
**Specified person for this purpose are as below:
- Author or founder of trust or institution
- Any person who has made substantial contribution i.e., contribution of > Rs 50,000 upto the end of financial year
- In case author, founder or person is HUF, a members of such HUF
- Trustee/ manager of the trust / institution irrespective of their designation nomenclature;
- Any relative of any of such author, founder, person who has made substantial contribution, trustee or manager as specified above
- Any concern in which any of the above specified persons has substantial interest i.e., total contribution of > 50% upto the end of financial year
Further, there might be cases when the Trust was not able to expend the amount towards the attainment of the main objective. In that case, there are various ways which the trust can opt to avoid the disallowability of exemption. These ways are discussed as follows:-
(i) If the Income was not applied to charitable/religious purposes due to reason that the AMOUNT WAS NOT ACTUALLY RECEIVED (but receivable) in the previous year then;
If the Trust declares this before the due date of filing of return that Trust would apply this income towards its religious/charitable purposes in the year in which it will be RECEIVED or immediately NEXT YEAR OF RECEIPT then such income would be allowed in the current year itself (even if this has not been spent actually). [If not utilized within such time limit it will be considered as income and no exemption would be given later on]
(ii) FOR ANY OTHER REASON; which means even if the Trust does has received its income actually but did not apply it towards charitable/religious purposes for any other reason (which may anything) then; If the Trust declares before the due date of filing of return that it would utilize this amount for charitable/religious purposes in the immediately NEXT YEAR (next year of year to which income belongs), then it would be allowed in the current year itself without actually expending the income. [If not utilized within such time limit it will be considered as income and no exemption would be given later on]
(iii) SPECIAL CASE:- As you can see above that in point (ii) amount must be expended in the immediately Next Year in which it has been earned. But there is one special case as well through which the trust can avoid the disallowability of exemption.
For this, Trust has to ACCUMULATE & SET APART that much income for the application towards charitable/religious purposes. Accumulate & set apart means the Trust has to Set Aside certain sum for a certain period and for certain purpose. Trust has to declare before the due date of filing of return through a statement containing the details of Purpose towards which it has been set apart and the Period for which it has been so set apart.
[IMP. NOTE: The above all 3 exception cases would be for the amount excluding 15% ad-hoc deduction which means the ad-hoc deduction would be allowed always irrespective of the expended amount and irrespective of any other condition.]
5. What is the Treatment of Capital Gains under Trusts?
If any capital assets of the Trusts which is wholly for Charitable or Religious purposes is transferred then and the NET SALE CONSIDERATION (i.e. total sale price as reduced by expenditure for such transfer) of such assets is utilized in the purchases of New Asset then;
- If the entire net sale consideration is utilized in new assets = then the whole of capital gains shall be exempt.
- If part of net sale consideration is utilized in new assets then;
[Amount Utilized in New Asset – Cost of Transferred (Old) Asset = Deemed as amount Utilised for charitable/religious purpose] and the excess amount would be taxable as capital gains.
6. Situations when Tax benefits are withdrawn?
There are also certain cases when the tax exemption u/s 11 & 12 is withdrawn from the Trusts. These are as follows:
A. When amount Accumulated & Set Aside for specific purpose has been transferred to general funds. Further, if any condition of Period or Purpose of such accumulation is breached later on then the exemption provided to the Trusts would be withdrawn. [In such case it will become the income of the previous year in which such default has been done.]
B. When Any of the following conditions arise:-
(i) Income is for private religious purpose and not for the public at large.
(ii) Income is for the particular religious community or caste etc. [Note- Any Trust created for the benefit of the SC/ST/OBC or women and children shall not be covered by this exclusion which means the exemption would be allowed for such Trusts.]
(iii) Income is for the benefit of the Specified Person* (e.g. Founder/Trustee/Relative etc.)
(iv) If funds are not invested as per the specified modes.
[Important Note- If any of the condition (i)/(ii)/(iii)/(iv) is breached or the Activities of the Trust are not genuine then the Registration of Trust may be canceled]
[* If any Medical or Educational Services are provided by Hospital, Medical Institution, or Educational Institution then the exemption u/s 11 & 12 shall not be withdrawn for all income of the Trust. The Exemption shall be withdrawn for this income only which has been received from the specified person by providing such services. The exemption would be available for the rest of the income.]
7. Can Charitable/Religious Trusts can do Businesses?
Yes, The Charitable/Religious trusts can do the business activities as well but such business must be INCIDENTAL to the attainment of the main object and SEPARATE BOOKS OF A/Cs has been maintained for such business.
8. What is the treatment of Anonymous Donations?
Anonymous Donations as its name suggests are the donations which have been received but without the identification of the person who has given. It might be received towards the free donation or as a donation towards corpus but in both the cases, it would be taxable. Anonymous Donations would be taxable @ Flat 30% u/s 115BBC (and no exemption u/s 11 & 12). But any amount received up to the HIGHER of the following limit would not be taxable at the rate of 30% but it shall be taxable normally:
- 5% of Total Donations; OR
- Rs. 1,00,000/-
Amount received only above this Limit would be covered by Section 115BBC and will be taxable @30%.
[Important Note- The Any Trust which is WHOLLY RELIGIOUS TRUST shall not be covered u/s 115BBC which means wholly religious trust could receive anonymous donation up to any limit and that would always be considered as the normal donations for them.]
9. Some Important Points:
a. What is the difference between Exemption u/s 11 & 12 & Deduction u/s 80G?
The Exemption u/s 11 & 12 is allowed to the Trust towards the income which has been applied for the object of the Trust. While Deduction u/s 80G is allowed to the Doner who is giving the Donation to the such Charitable/Religious Trust (which has also taken 80G Registration).
b. Is it necessary that money should have been actually spent for claiming exemption u/s 11 & 12?
No, If any liability for an expenditure has been incurred then such expenditure would be considered as the application of income.
c. Can Depreciation be also claimed by Trusts on its Assets?
No, If any trust has considered the amount spent on acquisition of assets as application of income then on such assets no depreciation would be allowed.