Tax Exemption of Charitable Trust
How to get the benefit under the Income tax act-
- If the Charitable or Religious Trusts have to get themselves registered under the income tax act u/s 12AA.
- If the objects of Trust has been modified later on from that of which was initially declared while taking the registration, then the Trust has to apply for the modification of the Registration Certificate of such Trust. If such modification is not been done then exemptions would not be allowed. [FA, 2017]
- If the Income tax return must have been filed within due date.
- If the Gross Receipts exceeds Rs. 2,50,000/- then the accounts of Charitable or Religious trust must be audited to get the tax benefit available to the Trusts under the act.
Income Tax on Charitable Trust-
This article is a guide on Section 164(2), which deals with taxability of income in relation to charitable trusts. The income of a charitable trust can be grouped under one of the following heads of income:
- Income which is derived from property held under trust for charitable or religious purposes.
- Income derived from voluntary contribution with or without specific direction that it shall form part of the corpus of the trust.
- Income from an incidental person.
- Capital Gains.
- Anonymous donations.
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Income category
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Description
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Taxable or exempted
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Voluntary Contribution
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Donations received with a specific direction that they shall form part of the corpus of trust or institution.
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It shall be exempted.
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Donations received without any specific instructions
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It shall be the part of income from property held under trust.
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Capital Gain from assets held under Trusts wholly for Charitable or Religious purposes
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Net Sale Consideration (i.e. total sale price as reduced by expenditure for such transfer) is fully utilised for purchases of New Asset
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The whole amount of capital gains shall be exempt from Income Tax
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Net Sale Consideration (i.e. total sale price as reduced by expenditure for such transfer) is partially utilised for purchases of New Asset
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[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.
Example- If cost of the asset transferred was Rs. 20 lakhs and the amount of capital gains is Rs. 10 lakhs. The new asset is acquired for Rs. 25 lakhs then the amount of capital gain which will be exempt shall be computed as:
Capital Gain to be exempt = Cost of new asset – cost of transferred asset
I.e. Rs. 25 lakhs – Rs. 20 lakhs = Rs. 5 Lakhs
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Anonymous Donations
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Donations made to a place or person where proper records aren’t maintained.
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Donation exceeding higher of the following-
1. 5% of the total donations or
2. Rs.1, 00,000
Will be taxed @ 30%, U/s 115BBC.
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Donation received for educational purposes, and the Trust operates the same
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It shall be the part of income from property held under trust.
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Income from property held under trust for charitable or religious purpose
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Such income is utilised for charitable or religious purposes in India
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Exempted
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If such income is not utilised for these purposes but accumulated or set apart for the purpose
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Exempt to the extent of 15% of such income i.e. at least 85% of income from property to be applied for charitable and religious purpose in India and balance 15% is allowed to be accumulated or set apart.
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The trust should apply at least 85% of its income to charitable or religious purpose in India, charitable purpose includes the following-
- Preservation of environment (monuments or places or objects of artistic or historic interest
- Advancement of any other object of general public utility i.e. receipts should not exceed 20% of the total receipt of the trust.
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.
When Tax benefits can be withdrawn-
There are also certain cases when the tax exemption u/s 11 & 12 is withdrawn from the Trusts. These are as follows-
- 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.
- When Any of the following conditions arises:-
(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. - 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.)- 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.
(iv) If funds are not invested as per the specified modes.