Charitable trusts and institutions play a crucial role in nation-building. However, their fiscal and legal compliance requirements under the Income-tax Act, 1961, are extensive and nuanced. This article provides a comprehensive overview of the key legal provisions governing the taxation and regulatory framework of charitable institutions in India.
(With reference to the Income-tax Act, 1961 and applicable Rules)
1. Definition of Charitable Purpose - Section 2(15)
As per the Income-tax Act, a "charitable purpose" includes:
- Relief of the poor
- Education
- Medical relief
- Preservation of the environment
- Preservation of monuments or places of artistic/historic interest
- Advancement of any other object of general public utility
Proviso Alert: If an institution engages in trade, commerce, or business for "general public utility", it will not be deemed charitable unless:
- The activity is undertaken in furtherance of its core charitable objectives, and
- The aggregate receipts from such commercial activities do not exceed ₹25 lakhs in a financial year.
2. Registration - Sections 12A & 12AB
To claim exemption under Sections 11 and 12, obtaining registration under Section 12A (legacy) or 12AB (current regime) is mandatory.
Key Compliance Points:
Application to be made in Form 10A online.
Registration is granted after due verification of:
- Charitable objectives of the trust/institution.
- Genuineness of activities carried out.
Without registration, exemption under Sections 11 and 12 is denied.
3. Audit and Return Filing - Section 12A(b) & Section 139(4A)
If total income before claiming exemptions exceeds the basic exemption limit:
- The accounts must be audited by a Chartered Accountant.
- Form 10B (Audit Report) must be filed.
- Return of income must be submitted under Section 139(4A) within prescribed timelines.
4. Application and Accumulation of Income - Section 11
Eligible for Exemption:
- Minimum 85% of income must be applied towards charitable or religious purposes in India.
- Balance 15% can be accumulated without conditions.
Additional Accumulation under Section 11(2):
Permitted when:
- Purpose is specific and aligned with the trust's objectives.
- AO is notified via Form 10.
- Income is invested as per Section 11(5).
- Compliance is ensured within the due date of return filing.
5. Corpus Donations - Section 11(1)(d)
Voluntary contributions made with a specific direction to form part of the corpus are 100% exempt from income tax.
Not subject to the 85% application requirement or audit conditions.
6. Anonymous Donations - Section 115BBC
Anonymous donations (without proper donor details) are taxed at 30%, if they exceed:
- ₹1,00,000, or
- 5% of total donations, whichever is higher.
Exemptions
- Fully exempt for wholly religious trusts.
- Applicable to charitable and mixed (charitable + religious) institutions.
7. Business Income - Section 11(4A)
Business activity is allowed only if:
- It is incidental to the trust's main charitable objectives.
- Separate books of account are maintained.
Non-incidental business income will result in loss of exemption.
8. Investment of Funds - Section 11(5)
Accumulated income under Section 11 must be invested only in prescribed modes, such as:
- Government savings schemes
- Bank FDs
- Specified mutual funds
- Bonds of public sector enterprises
Non-compliant investments attract forfeiture of exemption under Section 13(1)(d).
9. Disqualification from Exemption - Section 13
Exemption under Sections 11 and 12 shall not be available in these situations:
- Income is applied for private religious purposes.
- Trust benefits a specific caste or religious community (exceptions: SC/ST, women, children).
- Any benefit to trustees or related persons under Section 13(3).
- Non-compliance with Section 11(5) investments.
10. Deduction to Donors - Section 80G
Donors can claim 50% or 100% deduction on donations to approved institutions.
Approval Conditions
- Application in Form 10G
- Activities must not benefit a specific community
- Books must be maintained and audited
- Once approved, validity is permanent, unless withdrawn by the department
Summary: Best Practice Compliance Table
| Compliance Area | Requirement |
|---|---|
| Registration | Mandatory under Section 12AB |
| Audit | If income exceeds basic exemption limit |
| Return Filing | Under Section 139(4A) |
| Application of Income | 85% must be applied to charitable purposes |
| Accumulation | Up to 15% freely; more via Form 10 & Section 11(2) |
| Corpus Donations | Fully exempt if directed as corpus |
| Donor Records | Must maintain to avoid 30% tax under Section 115BBC |
| Business Income | Allowed if incidental + separate books maintained |
| Investments | Only permissible investments under Section 11(5) |
| Governance | No personal benefit to founders, trustees, or relatives |
Conclusion
Compliance with the legal provisions under the Income-tax Act is not merely procedural-it is vital to maintain tax-exempt status, build donor confidence, and ensure long-term sustainability. Trustees and professionals must remain vigilant and proactive in aligning their operations with these statutory obligations.
The author can also be reached at jayvadher05@gmail.com
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