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Taxation of charitable trust or religious institution in India as per Income Tax Act

Priyanka Sah 
on 07 May 2020

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Introduction

A charitable trust is an irrevocable trust established for charitable purposes. A charitable trust enjoys a varying degree of tax benefits in most countries.

In India, trusts set up for the social causes and approved by the Income Tax Department get not only exemption from payment of tax but also the donors to such trusts can deduct the amount of donation to the trust from their taxable income u/s 80G. Thus, Government of India has given various exemptions to charitable and religious trust keeping in view the services provided to the nation.

Charitable purpose

Sub-section 15 of Section 2 of the Income Tax defined charitable purpose which includes: -

  • Relief of the poor,
  • Education,
  • Yoga
  • Medical relief
  • Preservation of environment (including watersheds, wildlife, forest)
  • Preservation of monuments
  • Advancement of any other object of general public utilities

The advancement of any other object of general public utilities shall not be a charitable purpose if:

It involves carrying any activities in the nature of trade, commerce or business purpose, for a fee or any other consideration irrespective of its use or application of income from such activities.

However, carrying on commercial activities still regarded as charitable purpose if:

  1. Such commercial activities are undertaken to in the course of actual carrying out of such advancement of any other object of general public utility; and
  2. aggregate receipts from such activities does not exceed 20% of the total receipt of trust of that previous year.

Thus, the entire income of such trust is taxed as per sec 11-13 of the Income tax Act, 1961(be it from House property, Capital gain or any other income) rather as per there relevant provisions.

Incomes of charitable/ religious trust can be classified as follows:

1. Donation/voluntary contribution Sec11(1):


2. Income from property held under trust:

    

Particulars

Taxability

15% of gross receipts from property held under trust wholly for charitable or religious purpose.

Exempt

85% of gross receipts from such property trust.

 

1. Income applied for charitable/ religious purpose in India.

Exempt, to the extent such income applied to religious or charitable purposes in India.

“applied to charitable purpose” includes

  • Purchase of capital assets
  • Revenue expenses
  • Donation to religious/charitable trust (registered u/s 12AA or 10(23C)
  • Repayment of loan to purchase capital assets.

Deemed to be applied for charitable purpose in India:

Case where whole or any of income not received during the year.

Any other case:

Exempt if:

Assessee submits declaration to the A.O on or before due date of filling return of income u/s 139(1) that the income shall be applied for such purpose in the year of receipt or immediately succeeding year

Then, the amount for which such declaration is given is deemed to be applied for such purposes during the previous year in which income was derived.

Exempt if:

Assessee submits declaration to the A.O on or before due date of filling return of income u/s 139(1) that the income shall be applied for such purpose in the immediately following previous year.

Then, the amount for which such declaration is given is deemed to be applied for such purposes during the previous year in which income was derived.

  1. Income not applied for charitable/ religious purpose in India:

Income accumulated for specific purposes

Exempt u/s 11(2) if accumulated for specific purposes provided the following conditions are complied with:

  1. Assessee furnishes statement to the A.O. stating the purpose & period such income is accumulated or set aside (not exceeding 5 years).
  2. Money so accumulated is invested in the modes specified in sec 11(5) *
  • Exemption withdrawn if specific conditions not satisfied u/s sec 11(3):

Particulars

Year of withdrawal

Applied for the purpose other than the purpose for which it is accumulated or set aside

Deemed income of the previous year in which so applied.

Ceases to remain invested in specified modes in sec 11(5)

Deemed income of the previous year in which it so ceases

Not utilised during 5 years or year immediately following the expiry thereof.

Deemed income of the previous year immediately following the expiry of 5 years.

Donated to any trust registered u/s 12AA or institutions referred u/s 10(23C)

Deemed income of the previous year in which so donated.

Not accumulated for specific purpose in India

Taxable, if not applied for specific purpose and also not accumulated for specific purpose.

 

* Note

sec 11(5): modes in which income invested or deposited of charitable or religious trust:

  1. Investment in govt saving certificate/ units of UTI/CG or SG securities.
  2. Deposit with post office saving bank/scheduled or co-operative banks.
  3. Investments in debentures, however both interest and principal must been guaranteed by CG or SG.
  4. Investment or deposit in public sector company.
  5. Investment in bonds of approved financial corporation providing long term finance for industrial development/construction/ purchase of residential houses in India
  6. Investment in immovable property excluding plant & machinery, not being plant & machinery installed in building for the convenient occupation.

3. Capital Gain (sec 11(1A)):

Capital Gain arising from transfer of property held by religious / charitable trust shall be taxable as under:

  1. Where whole of net consideration utilised for acquiring new capital asset→ entire capital gain is exempt
  2. Where only part of net consideration is utilised for acquiring new capital asset→ capital gain exempt= (cost of net asset – cost of transferred asset)

4. Anonymous Donations (sec 115BBC):

Anonymous donation means:

Any voluntary contribution where donee does not maintain record of identity indicating the name and address of the donor and such other particulars as may be prescribed eg: offerings by devotees to the donation boxes in temples.

Taxability:

Step 1: compute the amount of total anonymous donation received by charitable /religious trust

Step 2: compute 5% of total donation received by the Assessee

Step 3: higher of following:

  1. Amount computed under step 2 or
  2. Rs. 100000

The amount of income tax calculated at the rate of 30% of anonymous donation in excess of amounted computed in step 3.

Anonymous donation not taxable u/s 115BBC if:

  1. Wholly Charitable Trust→ Anonymous donation to be taxed u/s 115BBC
  2. Wholly Religious Trust (not charitable purpose) eg: offerings by devotees to trust owing temples→ anonymous donations not to be taxed u/s 115BBC
  3. Wholly Religious & Charitable→ anonymous donations not to be taxed u/s 115BB, thus if donation made with a specific direction that such donation is for any education institution/hospital/medical institution run by such trust then TAXABLE.

Thus, anonymous donation not taxable u/s 115BBC →taxable under normal provisions & subject to provisions of sec 11& 12.

Anonymous donation taxable u/s 115BBC→no exemption u/s 11 & 12.

Sec 13: section 11 not to apply in certain cases

Exemptions of sec 11 & 12 not available in following cases:

  • Entire income from property held under a trust for private religious purposes that does not ensure benefit of public.
  • Entire income of a charitable trust created for the benefit of any particular religious community/caste.
  • Any income religious/charitable trust ensures directly/indirectly for the benefit of specified person u/s 13(3) or
  • Any property of trust for the benefit of specified person u/s 13(3).
  • Entire income of trust whose funds not invested or deposited in modes specified u/s sec 11(5) .

Specified person [sec 13(3)] includes:

  1. Author of trust/ founder of institution
  2. Person who have made total contribution of amount exceeding ₹50000(upto to the end of relevant previous year) i.e, substantial contributor.
  3. Where author, founder, substantial contributor is a HUF, member of HUF
  4. Trustee of trust/ manager of institution.
  5. Relatives of author, founder, substantial contributor, member, manager, trustee.
 

"We make a Living by what we get but We make a Life by what we give"- by Winston Churchill

Hope the above article helped you in some more clarity to this topic. Keep learning, keep exploring.


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