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Karniti Part-12: Income of Trusts, then follow & trust Indian law

CA Umesh Sharma 
on 26 November 2013

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Finance and Income Tax of Charitable Trusts

Let us try to get answers to our questions in a bit different and joyful manner. The fictional character of Arjuna will be played by the common man or tax payer and the fictional character of Krishna the Expert for giving solutions to all problems. Conversation is named as “KARNITI”. Just relex and enjoy knowledge sharing through this creative and fictional writing on tax and finance releated matters.

Arjuna (fictional character): Krishna, In India there are many religious/charitable trusts for e.g. temples, Ashram, Gurudwaras, hospitals, educational, etc. propagating and working for social and charitable activities. Tell me about their financial and taxing matters.

Krishna (fictional character): Listen Arjuna, these trusts have to follow many regulations. Mainly they have to follow the rules of Bombay Public Trust Act (For Maharashtra State), Indian Societies Act, Companies Act (old sec 25 and new section 8) and Income Tax Act. Further if the trust receives donation from foreign then registration under Foreign Contribution Regulation Act is required.  

Arjuna: Which things Charitable trusts should mainly follow?

Krishna: Every trust has to submit audited annual accounts approved in annual general meeting with the charity commissioner before 30th September. Annual budget is also required to be submitted. Further Change reports in respect of change in trustee, changes in the wealth of the trust, etc. are required to be submitted within a period of 90 day. If the change reports are not submitted then penalty may arise and penalty will be recovered from the trustees. Trust should keep all its registers updated. Trustees should expend on the objects of the trusts mentioned in trust deed. Further permission from the Charity Commissioner should have to be obtained while selling or transferring any land of the trust, otherwise such transactions would be considered as illegal. Further permission from Charity Commissioner should be obtained while taking or giving any loans. As per order of the court, contribution of 2% to Charity Commissioner is not required to be given.

Arjuna: What about income of the trusts as per Income Tax Act?

Krishna: As per section 11 and 12 of the Income Tax Act, income earned by the public trusts is tax free if registration is obtained under section 12 A by filing Form 10 A within one year from the start of the trust. Further exemption will be available from the year of registration. Exemption will be given if the conditions are satisfied, mainly:

1. Trusts should not be for the benefit of any caste or religion.

2. These trusts should not earn profit by doing business

3. Income should be used in  India on the objects of the trusts mentioned in trust deed.

4. Assets and income of the trust should not be used directly or indirectly for the benefit of trustee and their relatives.

5. Every year 85% of the income should be expended before 31st March

6. Every year Income Tax return should be filed before 30th September

Arjuna: Which income is tax free?

Krishna: Corpus donation or capital grant received for specific object to the trust is tax free. Capital gain of the trust is also tax free if certain conditions are fulfilled. Trust has to expend 85% of the donation received before 31st March. As per Income Tax Act, if 85% of income is not expended then application to income tax officer will have to be made for expending the balance in next year. Further if the trusts are carrying on any business activity for fulfilling the objects of the trust then the income earned will be tax free if certain conditions are fulfilled.

Arjuna: Krishna, it is said that in India, religious trusts have maximum gold and valuables. Are trusts required to pay wealth tax on it?

Krishna: As per Income Tax Act, wealth tax is not applicable to registered trusts. But God does not require wealth; God needs only devotion of devotees. 

Arjuna: Which income is taxable?

Krishna: if trust has not expended 85% of the income and has not submitted the form for expending the funds in upcoming years to the Income tax officer then as per Income Tax Act, tax will have to be paid considering the tax rates of AOP. Further Anonymous donation received / taken by education trusts and hospitals is taxed @ 30%.  

Arjuna: Are there any benefits under Income Tax to the donors on the donations given to these trusts?

Krishna: if these trusts are registered under section 80 G of the income tax act then deduction of donation after fulfilling certain conditions is available to the donor. If registration under section 80 G is obtained then expenditure on religious activities should not be more than 5%.

Arjuna: Krishna, you have explained me many things but now tell me about the taxability on the services provided by Sage, Pandit, Kirtankar, Maharaj?

Krishna: Arjuna, if the receipts of the services rendered are personal in nature then Income tax will have to be paid. Further if the receipts exceed Rs. 10 Lakhs then service tax @ 12.36% will also have to be paid.

Arjuna: Krishna, How trusts should make their financial planning?

Krishna: Arjuna, god is thirsty of faith and devotion from the devotees. Devotee’s faith lies in God and religious preaching in the religious places. Faith on one another is the base of trust. Trusts should not do any work willfully which may break the belief of people in them and the financial losses arising due to this would be the responsibility of the trustees. Nowadays there is huge flow of funds in religious places and keeping this in mind the government has made remarkable changes in the rules governing the trusts.

In India there are many trusts which work with the motive of keeping alive the Indian culture, tradition, values and morals. God is everywhere and He is in everyone’s sole. God keeps record of everyone’s deeds and accordingly today or tomorrow all will receive fruit of it. That’s why religious trusts should run transparently, if trusts do not abide to the law of the nation then even God would not be able to save them from its consequence’s. A person should keep faith but he should also see that this faith doesn’t change into blind faith. Hence follow indian law and keep trust in it. Please remember Wealth is not persious than God.

Disclaimer: This article is written for educational purpose. Please refer to respective laws before implementation. No intention to hurt any body or religious belief or sentiments, its just a fiction writing on tax and finance matters. Purpose of article is to share knowledge in simple and fun loving way.

Note: Dear readers, Thanks for your love and affection to this series. Please write your comments, It just takes few seconds to write it.


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