Taxability of Charitable or Religious Trust

Taxability of Charitable or Religious Trust

Charitable and religious trusts play a crucial role in the socio-economic landscape of India. To encourage philanthropy and public service, the Indian government provides income tax exemptions under specific provisions for entities engaged in charitable and religious activities. Sections 11 to 13 of the Income Tax Act, 1961, govern the taxation and exemptions related to these trusts. This blog delves into the key aspects, eligibility criteria, and conditions for exemption under these sections.

What are Charitable or Religious Trusts?

A trust refers to an arrangement in which a person (the trustee) holds property for the benefit of another (the beneficiary). Charitable trusts operate for the public good and must serve purposes such as relief of poverty, education, medical relief, or other objects of general public utility. Religious trusts are created specifically for religious purposes, such as maintaining temples, mosques, or other places of worship.

Under the Income Tax Act, these trusts can claim exemptions on their income if they comply with the conditions laid down in Sections 11 to 13.

Section 11: Exemption on Income from Property Held for Charitable or Religious Purposes

Section 11 provides an exemption on the income derived from property held under trust for charitable or religious purposes, subject to specific conditions. The exemption covers income applied toward the stated purposes in India.

Key Provisions under Section 11:

1. Income Applied for Charitable or Religious Purposes: A minimum of 85% of the income derived from property must be applied for charitable or religious purposes in India.
2. Accumulation of Income: If the trust or institution is unable to apply 85% of its income during the year, it can accumulate or set it apart for future use, provided it files Form 10 with the income tax authorities and uses the accumulated funds within five years for its charitable purposes.
3. Corpus Donations: Voluntary contributions received with a specific direction to form part of the corpus of the trust are not treated as income, provided they are invested in approved modes under Section 11(5)?(76199bos61579-cp10).

Section 12: Voluntary Contributions Treated as Income

Section 12 deems voluntary contributions (excluding corpus donations) received by a charitable or religious trust as income derived from property held under trust. Thus, such contributions are treated in the same manner as other income of the trust and must be applied toward charitable or religious purposes.

Section 12A and 12AB: Conditions for Exemption

To claim exemptions under Sections 11 and 12, a trust must fulfill certain registration and procedural requirements specified under Section 12A and 12AB.

Key Requirements:

1. Registration: Trusts must be registered with the income tax authorities under Section 12AB to avail exemptions under Section 11. The trust must apply for registration within the specified timelines, and the registration must be renewed after the expiry of a five-year period.
2. Books of Accounts: Trusts must maintain proper books of accounts and other relevant documents as per the Act.
3. Audit Requirements: If the total income of the trust exceeds the maximum amount not chargeable to tax, it must get its accounts audited by a chartered accountant and file the audit report with the income tax department?(76199bos61579-cp10).

Section 13: Loss of Exemption

Section 13 outlines situations where a charitable or religious trust loses its tax exemption. These provisions ensure that the income of the trust is not misused or diverted for personal or non-charitable purposes.

Key Scenarios Leading to Loss of Exemption:

1. Private Benefits: If any part of the income or property of the trust benefits specific individuals, such as the trustee or relatives of the trustee, the exemption under Sections 11 and 12 is forfeited.
2. Benefit to Particular Religious Community or Caste: A trust created after 1961 that applies its income for the benefit of any particular religious community or caste loses its exemption.
3. Non-Genuine Activities: If the activities of the trust are found to be non-genuine or not in accordance with the stated charitable or religious purpose, the exemption is denied?(76199bos61579-cp10).

Conditions for Claiming Exemption

To avail the benefits of tax exemption under Sections 11 to 13, charitable and religious trusts must adhere to several conditions:

1. Utilization of Income: At least 85% of the income must be applied for charitable or religious purposes within India.
2. Investment of Funds: Funds must be invested in specified modes such as government securities, bank deposits, and other approved investments under Section 11(5).
3. Filing of Returns: Trusts must file an annual income tax return even if their entire income is exempt. Failure to file within the due date results in loss of exemption.

Anonymous Donations and Their Taxability

A special provision under the Act relates to anonymous donations received by charitable or religious institutions. These donations are taxable under Section 115BBC unless the institution receiving the donation is an educational or religious institution where such donations are primarily for religious activities. However, anonymous donations are taxed at the maximum marginal rate if they exceed a specific threshold?(76199bos61579-cp10).

Conclusion

Sections 11 to 13 of the Income Tax Act, 1961, offer significant tax benefits to charitable and religious trusts, provided they comply with the stipulated conditions. These provisions encourage entities to engage in activities that contribute to the social and economic development of society, while ensuring that the income and property of the trust are used judiciously for charitable and religious purposes.

It is essential for trusts to be aware of their responsibilities regarding compliance with registration, audit, and filing requirements to continue availing the exemptions under the Act.