You must have heard about some of Charitable Trust or Religious Trust or any Trust which is doing both. You could find that in the form of NGOs, Mandir Trusts, Gurudwaras Trusts etc. They generally receive their source of operation by way of contributions, donations etc. They mainly work toward the betterment of the Society and serve public at large. Their causes are pious and society needs them. And that's why in the tax system also they have been provided with a lot of benefits in order to enhance and promote them. So, today we are going to discuss the concept of Charitable/Religious Trusts and various tax benefits which the govt. has provided them. Let's understand them:
1. What is Charitable/Religious Trust?
Charitable Trust: It is the Trusts which has an objective of Charitable Purposes and provides voluntarily help. They are non-profit based and their main purpose is toward activities which are for the benefit for the Society at large.
Charitable Purpose includes various acts like the relief of the poor, promoting education, yoga, medical relief, preservation of the environment, preservation of monuments (e.g Taj Mahal, Red fort etc.) and also Advancement of any other activities which are of general public benefit.
Religious Trust: Religious Trusts has not been defined under the income tax act. The creation of Religious Trust is governed by the personal laws of the religion. But in general connotation, it can be deemed as the Trusts which are involved in the activities of promoting religion or particular belief.
But in reality, most of the Religious Trusts also promote the charitable causes as well e.g. education, medical facility, providing food the poor etc. and such types of Trust are called Charitable & Religious Trust.
2. How it is being created?
For this, we have to understand the types of Trusts first. Trusts can be categories mainly in two categories: (i) Private Trusts (ii) Public Trusts
The Private trusts are covered under the provisions of Indian Trusts Act, 1882 and its creation are also done as per the type of trust and as per the relevant provision of the said act.
While here we are talking about Charitable and/or Religious Trusts; these are the trust which comes under the category of Public Trusts. There is no central Act for applications in all the States. But various states such as Bihar, Madras, Madhya Pradesh, Orissa, etc. have enacted their own acts prescribing conditions and procedure for the administration of Public Trusts.
3. How to get the benefit under the Income tax act?
- For having the benefit of exemptions under the income tax act, 1961 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]
- Also, Return must have been filed within due date.
- If 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.
4. What tax benefits are available to it?
As the main purpose of giving the tax benefits to the Charitable/Religious Trusts is to promote their social welfare and religious causes and that's why the exemptions provided to these Trusts have also been linked with the fulfilment of such causes. The Trusts need to pay the taxes on the receipts which has not been utilized for the said purposes. The Tax Calculation will be done as follows:
Gross Receipts from property held under Trust
[including voluntary donation*] xxx
Less: 15% Ad-hoc Deduction (It will be given in every case) xxx
Less: Expenditure towards the main purpose of such Trust xxx
Total Income xxx
Now tax would be calculated on such total income. The tax rate on Trusts would be same as on Individuals.
[*This shall not include donation towards Corpus. Any Voluntary Donation towards Corpus of Trust shall always be Exempt.]
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:
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).
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.
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.
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