Tax Exemption for Trusts & Charitable Institutions in India

‘Charitable trust’ refers to a form of entity that has been established to cater certain religious or humanitarian services to the public. Trusts set up for charitable or religious purposes that are not intended to carry on a business are eligible for various benefits under the Income Tax Act 1961.

As per Section 2(15) of the Income Tax Act, 1961, ‘charitable purpose’ includes providing relief to the underprivileged, education, yoga, medical aid, preserving the environment (which includes forests, wildlife, etc.), preserving monuments, place or objects that have some artistic or historic interest, and providing any other utility items that are used by the public.

Charitable trusts are taxed according to Chapter III of the Income Tax Act, 1961, which comprises Section 11, 12, 12A, 12AA, and 13. Following are the aspects governed by the above-mentioned provisions of the Income Tax Act:

• Section 12A/12AA: Consists of provisions pertaining to registration and the registration process as per the Income Tax Act, 1961.
• Section 11 & 12: Provides certain conditions that must be fulfilled for a charitable trust before it can claim relief under the Income Tax Act.
• Section 13: Lists the trusts that cannot be exempted under Sections 11 and 12.

For exemption under Section 11 of the Income Tax Act, 1961, the assets must be held under the Trust. Whereas Section 12A states that exemption under Sections 11 and 12 can only be availed of if the following conditions are fulfilled:

• Registration: The trust must register itself under Section 12AA with the Commissioner of Income Tax (CIT).
• Audit: In cases where the income of the Trust or charitable institution exceeds the general exemption limit of INR 2,50,000 in any of the previous years, the accounts of such an entity must be audited.
• Return: Under Section 139 (4A) of the Income Tax Act, 1961, anyone who receives an income generate by an asset held under a Trust or via other legal obligations entirely for charitable or religious purposes shall be required to provide a return for such income if the total amount for which they are assessable is over INR 2,50,000.

As per Section 11(1) of the Income Tax Act, 1961, the income, profit and gain generated from an asset held under a trust entirely for religious and/or charitable purposes will not be included in the total income of the Trust or Institution if such income is used or collected for application to such purposes. The exemption is allowable under specified circumstances, subject to certain conditions.

To be able to apply for tax exemption, it is imperative that the trust's proceeds are used for such purposes. A charitable foundation or charity must use at least 85% of its proceeds for charitable purposes. If the income spent in the previous year for charitable or religious purposes is less than 85% of the income earned in that year, this shortfall is taxable.

Any voluntary contribution or donation, which is not made with a specific instruction of being added to the corpus funds of the trust, shall be considered as income derived from property held under the trust.

In cases where 85% of the income generated by assets of a trust is not used for charitable reasons but is stored or set aside to be used for such purposes, trusts can claim the exemption for the income collected or set apart in excess of the 15% limit if the below-mentioned conditions are fulfilled:

• Within the time prescribed to provide the return under Section 139(1), a statement in Form-10B must be uploaded online informing about the amount being gathered and the period for which it shall be gathered.

Failing to upload Form-10B prior to such a date shall result in ineligibility to claim benefit of gathering such an amount and such income shall be taxable at the apt rate.

• The period of accumulation is not more than 5 years.
• The amount collected is invested or deposited in modes/forms mentioned under Section 11(5).
• The benefit of accumulation would not be available after the assessment year 2016-17 if the return for such income is not submitted prior to the due date for filing the return, as prescribed under Section 139(1).

As provided under Section 2 of the Government Savings Certificates Act, 1959, the money gathered or set aside more than 15% must be invested in savings certificates or deposited in a scheduled bank or cooperative societies’ account. They can also be invested in units of Unit Trust of India (UTI) or securities created and issued by the State/Central Government or deposited in the savings bank of a Post Office. Further, they can also be invested in debentures that is issued by or on behalf of a company/corporation where the central/state government entirely and unreservedly guarantees the principal and interest, etc.


Situations under which the tax exemption does not apply or will not be granted are as follows:

• Entire income from property held under trust is for private religious purposes which are not established for the benefit of the public.
• Entire income of charitable trust/institution is to indirectly benefit the people from a certain caste or religion.
• The income used or gathered is for charitable purposes countries other than India.
• If the income, completely or a part of it, and any asset of the charitable/religious trusts or institutions is utilized for a specific individual’s welfare, i.e., someone who made a significant contribution to the trust, for the founder of the trust, the manager, etc.
• Income of charitable/religious trust not applied and falls below 85% of the total income is further not invested as provided under Section 11(5) of the Income Tax Act, 1961.
• Value of medical or educational services made available by any charitable or religious trust running a hospital, medical institution or educational institution to a specified person, i.e., author or founder of trust or institution, a person who has made a substantial contribution, trustee/ manager of the trust, etc.
• Any income, profits and gains of business, unless that business is incidental to the attainment of the objectives of the trust or institution and the trust, has made to separate books of accounts in respect of such business.
• Belated filing of Income Tax Return and Audit Report in Form 10B results in no tax exemptions for Charitable Trusts.

In the above situations, exemptions will not be available and such income will be taxable at an appropriate rate.

Conclusion

Whether a Trust or charitable institution can obtain any tax exemption relies entirely on its compliance with the relevant rules and regulations provided under various Acts in India, such as the Income Tax Act, 1961. While there are certain tax exemptions available, there are also some scenarios where applying for such exemptions would not be fruitful at all.