Section 115TD Tax at MMR for trusts in certain cases

It is often observed in the case of certain trusts that incomes or gains accrue or accumulate over a period. Usually, the objective of the funds received by trust are to utilise the same for charitable purposes or purposes on which grounds the registration was sought to such trusts. Section 115TD ensures that benefits accrued over the period by claiming exemptions from tax on charitable grounds are not misused upon converting of trust into any other form. Hence, an exit tax is levied on such trusts over this accreted income.

Section 115TD provisions:
Section 115TD provides that accreted income of a trust or institution is taxable in below circumstances:

• Trust is converted into any form which is not eligible for grant of registration under section 12AA. Trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA:

1. The registration granted to it under section 12AA has been cancelled
2. Trust has modified its objects which are not as the ones on which registration was granted and it a) not applied for fresh registration b) application for such registration was rejected

• Trust is merged with an entity which is not having similar objects 
• Trust failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or approved u/s 10(23C) within a period of twelve months from the end of the month in which the dissolution takes place.
• trust or institution will be liable to pay additional income tax on accredited income at maximum marginal rate.

Let us now understand what does accreted income means.

Accreted income means the amount by which the aggregate fair market value of the total assets of the trust or the institution, as on the specified date exceeds the total liability of such trust or institution computed in accordance with the method of valuation as may be prescribed.

However, in computing FMV of assets, following assets shall not be included:

1.  Assets, which have been acquired directly out of agriculture income referred to in section 10(1).
2. Assets which have been acquired between the period beginning from the date on which trust in created and ending on the date on which registration u/s 12AA become effective, if no benefit u/ 11 and 12 is given during said period.
3.  In case of dissolution of trust , the assets which have been transferred to either Trust/institution registered u/s 12AA or other institution registered u/s 10(23C)((iv)/(v)/(vi/(via), within period of 12 months from the end of the month in which dissolution take place.

Rate of accreted income tax:
The tax on the accreted income shall be payable by such institution even if no income-tax is payable by it on its total income computed in accordance with the provisions of this Act. The tax on accreted income will be levied at the “maximum marginal rate”, which term has been defined in section (29C).

Tax on accreted income is to be increased further by surcharge @ 12% of such tax [section 2(4) of the Finance Act, 2023].

Accreted Tax = Accreted Income * Maximum Marginal Rate (34.944% for AY 2024-25) for such trust or institutions

Conclusion:
Section 115TD, Accumulation or Specified Trusts (such as certain charitable trusts or institutions) are subject to additional income tax on the distributed income to its beneficiaries, if such income remains undistributed beyond a specified period. The undistributed income, known as “accreted income,” is taxed at Maximum Marginal Rate. 

The section 115TD also focuses on the calculation of accreted income and its applicability to certain trusts and institutions. This was specifically brought to monitor activities of certain trusts when they had merged with another non-charitable organisation where the money collected for charitable purposes was being shifted to such non-charitable institution.

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.