Clarification from CBDT with respect to Charitable Donations and Application of Income

Charitable trusts and institutions in India can qualify for tax-exempt status under Section 11 of the Income Tax Act if they meet certain conditions. To qualify, the trust or institution must be created for charitable purposes and must apply its income towards these purposes. While income applied towards charitable purposes is generally exempt from taxation, any income not applied towards these purposes may be subject to taxation. This includes income from investments, rental income, or other sources not directly related to charitable activities.

The Central Board of Direct Taxes has issued a clarification in detail regarding donations made by trusts or institutions to other trusts and institutions in circular No. 03/2024.

What does the circular provide?
Any trust or institution registered under sections 12AA or 12AB of the Income Tax Act 1961 is eligible for exemption from taxation, provided conditions are met as prescribed in provisions of section 11 and section 12 of the Income Tax Act. According to these provisions, at least 85% of the income of the trust or institution is to be applied towards charitable or religious purposes. Remaining 15% of the amount is usually the topic of discussion whether it should be taxable or it should be eligible for accumulation, since the funds have already been donated by the donor. Representations have been received raising the concern that whether the balance 15% of donation to other trust / institution would be taxable or is eligible for 15% accumulation since the funds would not be available having been already disbursed.

The highlight of this circular comes when it states that, when a trust or institution donates certain amount to another trust or institution, 85% of the donated amount will be considered as application to charitable or religious purpose and the balance 15% of the amount will also not be taxable .

The circular also provides its insights on the following point:

If donations are made to other trust or institution, the donation should not be towards corpus to ensure that the donations are applied by the donee trust or institution for charitable or religious purposes.

Income tax Department has provided an extensive illustration to make this circular to be understood to all. This illustration is given as follows:

Conclusion:
With the help of this circular, CBDT is trying to bring transparency and accountability in application of funds used donated to trusts or institutions. This provides how an eligible trust/institution should compute the application of its income and claim exemption under section 10(23C) or section 11, in relation to donations made to other trusts/institutions.

Circular link : https://incometaxindia.gov.in/communications/circular/circular-3-2024.pdf

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.