Income of Charitable Trusts

A charitable trust is a non-profit organization which is established for the purpose of betterment of society in general or to support a specific section of the society. Upliftment of such sections of the society is general motive of the charitable trusts. Keeping in mind this very nature of the charitable trusts, income tax act provides certain exemptions to charitable trusts.

These exemptions are only available for specific types of income. Such trusts must fulfil certain conditions in order to claim these exemptions. Provisions relating to taxation of such charitable trusts are dealt with in accordance with section 11 of the Income Tax Act, 1961.

Section 11 of the Income Tax Act:
The purpose of a charitable or religious organisation is to carry out activities for which such entities are set up. Section 11 provides an income tax exemption where income derived from property held under charitable trusts and institutions. In order to claim these exemptions, such income must be derived from properties that are operating solely for religious or charitable purposes. Additionally, the entities must obtain a registration certificate under Section 12A or Section 12AA of the Income Tax Act.

For obtaining exemption from tax under Section 11, few other conditions are also required to be fulfilled:

• Books of accounts of such trusts must be audited by a Chartered Accountant.
• Audit Report & Income Tax returns should be filed within the prescribed due date.
• The income or property of such institutions should not apply for the direct or indirect benefit of any person defined under Section 13(3).
• Income should not benefit the settler directly or indirectly.
• Mode and manner of fund deposits and investments should be according to provisions of section 11 and 13.

Following is a list of incomes which are exempt from tax under section 11 of the Income Tax Act:

• Income of trusts or institutions from property that engages in religious or charitable activities.
• 15% of the institution’s total revenue earned or received in the previous financial year from such charitable or religious activities.
• Funds which charitable institutions or trusts receive must be in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.
• Capital gains by trusts from capital asset transfers up to an extent in which the net consideration amount is utilised to acquire a new capital asset which is held under trust for wholly charitable or religious purposes, the entire amount of capital gains would be deemed to have been applied for charitable or religious purposes.

As mentioned in the above provisions, 85% of income from property should be applied to charitable or religious activities. However, what if 85% of income is not applied?

If a trust or institution is unable to apply 85% of its income from property held under them, the exemption from tax on income is still available if the following conditions are satisfied:

• The income is  deemed to have been applied for charitable purposes in specific circumstances
• 85% of income is neither applied not deemed to have been applied, the trust is allowed to accumulate such unapplied portion of income under specified conditions to claim the exemption.

Application of funds:
Section 11 has prescribed modes for utilisation of such 85% of revenue from property. The 85% funds amount will not be considered as income if :

• Institutions invest the funds in modes specified under Section 11(5).
• They submit Form No. 10, which is a notice to the assessing officer informing about income accumulation by a charitable trust at least two months before the due date for filing IT returns.
• Entities mention the purpose for which the funds are set aside.
• The income has been set aside due to a court injunction or order.  

Section 11(5) of the IT Act deals with the modes of investment prescribed under Section 11 which can be immovable properties, investments in certain government saving certificates, Savings certificates and other securities or certificates issued by the Central Government, various shares, deposits with posts or UTIs etc.

Conclusion:
A charitable trust is the non-profit sector, designed to support and advance various public welfare causes and charitable as well as religious activities. Section 11 provides exemptions from tax to such institutions adhering to the provisions mentioned in the income tax act. To put it in brief, section 11 allows 15% of the income of such institutions to be kept for use other than for charitable purposes ro religious purposes. Rest of the 85% of contributions received are supposed to be utilised for such charitable purposes subject to fulfilment of certain other conditions.

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.