Taxation of charitable trust
This query is : Resolved
30 March 2016
Xyz is a trust registered under income tax and having 80G certificate
During the year 13-14
Gross receipt from school fees-15 lacs
School expenses-14 lacs
Income/profit-1 lac
I have to file income tax return of the trust but not sure whether 85% is to be calculated on gross receipt or net profit
Waiting for the views of the expert ???
During the year 13-14
Gross receipt from school fees-15 lacs
School expenses-14 lacs
Income/profit-1 lac
I have to file income tax return of the trust but not sure whether 85% is to be calculated on gross receipt or net profit
Waiting for the views of the expert ???
30 March 2016
To be calculated on gross receipt.
Message likes :
1 times
26 July 2025
You're absolutely right to seek clarification — this is a commonly misunderstood area when it comes to charitable trusts under the **Income Tax Act, 1961**, especially in relation to **Section 11** and **Section 12**.
---
## ✅ Answer:
**The 85% application rule is based on the Gross Receipts**, **not net profit**.
---
## 🔍 Explanation:
### ✔ What the Law Says:
Under **Section 11(1)(a)**:
> A trust is required to **apply at least 85% of its income** (i.e. receipts) **for charitable purposes** to claim full exemption.
So in your example:
* **Gross receipts (school fees): ₹15 lakhs**
* **85% of ₹15 lakhs = ₹12.75 lakhs**
* **School expenses: ₹14 lakhs**
Since the trust **spent more than ₹12.75 lakhs**, the requirement is met — the **entire income of ₹1 lakh becomes exempt**.
### 📌 Important Note:
The term “income” under Section 11 is interpreted by courts and the CBDT to mean **gross receipts**, not merely accounting profit (net profit).
---
## 🧾 Filing ITR:
When filing **ITR-7**:
* You **mention both** gross receipts and net income.
* In **Schedule AI** and **Schedule ER**, you'll report:
* Total receipts (₹15 lakhs),
* Total application (₹14 lakhs),
* Balance of income,
* Whether 85% rule is met.
---
## 🛑 Mistake to Avoid:
Do **not** calculate 85% on **net income/profit** (₹1 lakh in this case), or else the trust may be wrongly considered as having not applied sufficient funds and may face tax on “accumulated” income.
---
### ✅ Summary:
| Item | Amount (₹) |
| ----------------------------- | ------------------------------------------- |
| Gross Receipts (School Fees) | 15,00,000 |
| Required Application (85%) | 12,75,000 |
| Actual Application (Expenses) | 14,00,000 |
| Result | ✅ 85% rule satisfied — entire income exempt |
---
If you need help filling out **ITR-7** or generating the proper schedules for a trust, I can help guide you through the fields.
---
## ✅ Answer:
**The 85% application rule is based on the Gross Receipts**, **not net profit**.
---
## 🔍 Explanation:
### ✔ What the Law Says:
Under **Section 11(1)(a)**:
> A trust is required to **apply at least 85% of its income** (i.e. receipts) **for charitable purposes** to claim full exemption.
So in your example:
* **Gross receipts (school fees): ₹15 lakhs**
* **85% of ₹15 lakhs = ₹12.75 lakhs**
* **School expenses: ₹14 lakhs**
Since the trust **spent more than ₹12.75 lakhs**, the requirement is met — the **entire income of ₹1 lakh becomes exempt**.
### 📌 Important Note:
The term “income” under Section 11 is interpreted by courts and the CBDT to mean **gross receipts**, not merely accounting profit (net profit).
---
## 🧾 Filing ITR:
When filing **ITR-7**:
* You **mention both** gross receipts and net income.
* In **Schedule AI** and **Schedule ER**, you'll report:
* Total receipts (₹15 lakhs),
* Total application (₹14 lakhs),
* Balance of income,
* Whether 85% rule is met.
---
## 🛑 Mistake to Avoid:
Do **not** calculate 85% on **net income/profit** (₹1 lakh in this case), or else the trust may be wrongly considered as having not applied sufficient funds and may face tax on “accumulated” income.
---
### ✅ Summary:
| Item | Amount (₹) |
| ----------------------------- | ------------------------------------------- |
| Gross Receipts (School Fees) | 15,00,000 |
| Required Application (85%) | 12,75,000 |
| Actual Application (Expenses) | 14,00,000 |
| Result | ✅ 85% rule satisfied — entire income exempt |
---
If you need help filling out **ITR-7** or generating the proper schedules for a trust, I can help guide you through the fields.
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