Profit from mf

Income from investments in mutual funds is exempt from tax in the hands of religious and charitable trusts subject to fulfilling certain conditions. According to Section 11(2) of the Income Tax Act, any income derived by a religious or charitable trust is exempt from tax if at least 85 per cent of the income is spent on charitable or religious purposes in the same financial year. In other words, the trusts can allocate upto 15 per cent of a year's income for application to charitable or religious purposes in future years, without attracting income tax. 

Alternatively, the charitable trust can also keep the total income for future use in charitable or religious purposes for a period of five years, and claim tax exemption in the year in which the income is earned, if the amount so earned is invested in investments specified under Section 11(5) of the IT Act read with Rule 17C of the I-T Rules, 1962. If you wish to avail of this exemption, you will need to give a prior notice to the Assessing Officer specifying the purpose for which the amount is accumulated or set apart.

This is the same section, which allows charitable and religious trusts to invest in mutual fund units. But certain states like Maharashtra, Madhya Pradesh, Andhra Pradesh, Gujarat and Rajasthan require individual schemes to be accorded the status of "public security" to qualify as investments. Currently, most mutual fund schemes have been accorded this status by the Maharashtra government. Thus, charitable and religious trusts in the Maharashtra State can invest in these schemes. 

Moreover, Principal Mutual's Principal Trust Benefit Scheme is designed specifically for charitable institutions, and has been approved by Maharashtra government as "public security". The scheme has two plans - debt plan and gilt plan. The minimum investment is at Rs 50,000. The debt plan has given a one-year return of 9.72 per cent as on March 11, 2004. 

However, when a trust invests in mutual funds, its tax liability starts only when the units are redeemed and not at the time of investment. With other debt instruments, trusts have to pay tax on the interest earned every year on an accrual basis even though the income might be received in the form of interest in subsequent years.