Taxation of charitable trust

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ankit (Querist)
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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 ???

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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30 March 2016 To be calculated on gross receipt.

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ankit

ankit (Querist)
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05 April 2016 but in itr form it says net profit and gross receipts

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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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**.

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## ✅ Answer:

**The 85% application rule is based on the Gross Receipts**, **not net profit**.

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## 🔍 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).

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## 🧾 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.

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## 🛑 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.

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### ✅ 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 |

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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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