Investment in fixed deposit by a trust
This query is : Resolved
29 January 2016
As per Income Tax Act, Income derived from property held under trust or of an institution (‘trust’) wholly for charitable/religious purpose is exempt, if 85% of the income is spent on the objects of the trust, during the year.
So can we consider Investment in Fixed Deposit for the calculation of 85%.
Kindly provide with proper justification.
So can we consider Investment in Fixed Deposit for the calculation of 85%.
Kindly provide with proper justification.
10 February 2016
Some one please reply.
01 August 2024
Under the Income Tax Act of India, the income of a trust that is established for charitable or religious purposes can be exempt from tax if certain conditions are met. One of these conditions is that at least 85% of the income derived from the property held under the trust must be utilized for the objects of the trust during the year.
### **Investment in Fixed Deposits and the 85% Rule**
**1. **Inclusion of Fixed Deposits in 85% Calculation:**
- **Investment Status:** The investment in Fixed Deposits (FDs) by the trust is considered a way to manage and grow the trust’s funds. The interest earned on these FDs is part of the trust’s income.
- **Utilization of Income:** For the purpose of the 85% rule, the focus is on the utilization of the income derived from the trust's property. If the trust invests in FDs, the interest income earned from these deposits will be part of the trust’s income.
- **Expenditure Requirement:** To comply with the requirement, the trust must spend at least 85% of its total income (including the income from FDs) on its charitable or religious activities during the financial year.
### **Proper Justification and Explanation:**
1. **Income Derived from Property:**
- As per Section 11(1)(a) of the Income Tax Act, income derived from property held under the trust must be applied to charitable or religious purposes. This includes all forms of income, whether it is from investments, donations, or other sources.
2. **Calculating the 85% Utilization:**
- **Total Income Calculation:** The total income of the trust includes interest income from FDs and other sources of income.
- **Spending Requirement:** At least 85% of this total income must be spent on the objects of the trust, which are charitable or religious activities. This spending requirement is to ensure that the income is used in furtherance of the trust’s objectives rather than being accumulated without purpose.
3. **Investment and Utilization:**
- **Investment for Growth:** While the investment in FDs helps in growing the trust’s funds, the income from these investments (interest) is part of the trust’s income and must be considered when calculating the 85% utilization.
- **Exemption and Compliance:** To avail of tax exemptions, the trust must demonstrate that 85% of its total income (including the income from FDs) has been utilized for its charitable or religious purposes.
### **Documentation and Reporting:**
- **Maintain Records:** The trust should maintain proper records of all investments, including Fixed Deposits, and the interest income earned from them.
- **Utilization Statement:** Provide a clear statement showing how the income, including interest from FDs, has been utilized for charitable or religious purposes.
- **Tax Filing:** Ensure that the trust’s tax filings reflect the total income (including from FDs) and the expenditure towards charitable purposes.
### **Conclusion:**
Yes, investments in Fixed Deposits can be considered for the calculation of the 85% expenditure requirement. The income from these FDs is part of the total income of the trust, and at least 85% of this total income must be utilized for charitable or religious activities to maintain tax exemption.
For precise guidance and to ensure compliance with all relevant provisions, it is advisable to consult a tax professional or legal advisor specializing in trust law and tax regulations.
### **Investment in Fixed Deposits and the 85% Rule**
**1. **Inclusion of Fixed Deposits in 85% Calculation:**
- **Investment Status:** The investment in Fixed Deposits (FDs) by the trust is considered a way to manage and grow the trust’s funds. The interest earned on these FDs is part of the trust’s income.
- **Utilization of Income:** For the purpose of the 85% rule, the focus is on the utilization of the income derived from the trust's property. If the trust invests in FDs, the interest income earned from these deposits will be part of the trust’s income.
- **Expenditure Requirement:** To comply with the requirement, the trust must spend at least 85% of its total income (including the income from FDs) on its charitable or religious activities during the financial year.
### **Proper Justification and Explanation:**
1. **Income Derived from Property:**
- As per Section 11(1)(a) of the Income Tax Act, income derived from property held under the trust must be applied to charitable or religious purposes. This includes all forms of income, whether it is from investments, donations, or other sources.
2. **Calculating the 85% Utilization:**
- **Total Income Calculation:** The total income of the trust includes interest income from FDs and other sources of income.
- **Spending Requirement:** At least 85% of this total income must be spent on the objects of the trust, which are charitable or religious activities. This spending requirement is to ensure that the income is used in furtherance of the trust’s objectives rather than being accumulated without purpose.
3. **Investment and Utilization:**
- **Investment for Growth:** While the investment in FDs helps in growing the trust’s funds, the income from these investments (interest) is part of the trust’s income and must be considered when calculating the 85% utilization.
- **Exemption and Compliance:** To avail of tax exemptions, the trust must demonstrate that 85% of its total income (including the income from FDs) has been utilized for its charitable or religious purposes.
### **Documentation and Reporting:**
- **Maintain Records:** The trust should maintain proper records of all investments, including Fixed Deposits, and the interest income earned from them.
- **Utilization Statement:** Provide a clear statement showing how the income, including interest from FDs, has been utilized for charitable or religious purposes.
- **Tax Filing:** Ensure that the trust’s tax filings reflect the total income (including from FDs) and the expenditure towards charitable purposes.
### **Conclusion:**
Yes, investments in Fixed Deposits can be considered for the calculation of the 85% expenditure requirement. The income from these FDs is part of the total income of the trust, and at least 85% of this total income must be utilized for charitable or religious activities to maintain tax exemption.
For precise guidance and to ensure compliance with all relevant provisions, it is advisable to consult a tax professional or legal advisor specializing in trust law and tax regulations.
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