Income Tax Exemption for Trust under Income Tax Act

Ashish M. Shaji

16 Mar, 2023

Trusts enjoy income tax exemption under the Income tax Act. A trust that is registered under Section 12 A of the Income Tax Act is exempted from paying income tax. In this article, we shall discuss Income tax exemption for trusts.

What is a Trust?

Trust is considered to be the oldest form of charitable organizations. It is an arrangement amongst parties where one party holds ownership over property on behalf of another person. Trust is established as well as governed as per the Indian Trusts Act in case of private trusts.

Trusts work for the benefit of the needy. The companies formed as trust don’t have their interests in mind but rather work as a form of community service. Therefore to encourage these organizations, the government has offered various tax benefits to them.

Income Tax Exemption: 12A Registration

12A registration is a one-time exemption that can be availed by the trust. This helps them to get an exemption from paying tax right after their incorporation. Section 8 of the Income Tax act permit companies, trusts, and NGOs (Non-Governmental Organizations) registered under 12A to be exempted from paying tax on their surplus income.

It is a kind of tax benefit which is availed by all non-profit NGOs operating in India. Therefore Trusts, NGOs, and not-for-profit organizations should be aware of this and should register according to Section 12 A of the Income Tax Act to benefit.

Income Tax Exemption: Benefits of 12A Registration

The trust can get the following benefits:

• Funds used for charitable or religious purposes are deemed as income application and is therefore added to the trust value instead of being considered taxable income.
• The income received by an organization registered under 12A is exempted from taxation.
• Such an organization can set aside up to 15% of their income as investment.
• It shall have access to grants and other funds from agencies in India and also around India.
• Avail benefits listed under the Finance Act of 2014^[1].
• Considering it’s a one-time registration, it shall be valid until it’s cancelled and therefore needs no renewal or excessive paperwork.
• Laws that state that accumulated wealth can be taxed is not viable for organizations registered under 12A.

Form 10A

Charitable and religious trust and sections that abide by the rules provided in Section 8, which try to claim tax benefits provided in Section 11 and 12 of the Income Tax Act, should have a valid 12A registration in order to claim tax benefits. To complete 12A registration, applicants are required to submit form 10 A to the Income Tax commissioner online. 

How to file Form 10A online?

You may file form 10A online by following these steps:

• Firstly, go to the official website of the income tax;
• There click on submit returns/forms that is reflected on the left-most bar on the website;
• Then, go to the login option and key in your credentials;
• Select the e-file option and go to Income tax forms from the drop down menu;
• Select Form 10A in the form name field and select the appropriate assessment year;
• Select Prepare and Submit Online and then press on Continue;
•  Fill the form completely by entering the relevant details that is asked. Ensure that you re-check everything and avoid typographical error; and
•  Finally, click Submit.

How to register for 12 A?

In order to register for 12A, the following steps may be followed:

• Submit Form 10 A as prescribed above;
• You may file Form 10A online in case you have your digital signature, or else you may file it through an electronic verification code;
• Then the Commissioner shall request for additional documents or any information in order to prove that the Trust is genuine if required;
• If the Commissioner is satisfied with the genuine of the trust, he shall register the trust according to the 12A of the Income tax act;
• If he or she is not satisfied, they can reject the application;
• This process may usually take close to 3 months time to complete;
• When the registration order is passed, the trust shall have a 12A validity forever as it’s a onetime application or registration  process; and
• The trust is not required to renew the registration.

12A: Documents Required

You are required to attach the following documents:

• Copy of trust creation which unambiguously establishes its creation, its location, and the date of its establishment;
• Documents about the location and whereabouts of the trust;
• The copy of trust registration with registrar of companies/firms/societies;
•  Documents relating to the adoption of objects, if applicable;
• Accounts related copies of the trust;
• Documents having the details about the activities performed by the trust;
• The copy of 12A registration; and
• Copy of the rejection order obtained at the time when trust applied for a 12A registration, if applicable.

Conclusion

When a Trust is established, they have to register as per 12A for claiming Income tax exemption under Income Tax Act. Section 12A of the Income Tax Act allows non-profit organizations such as trust, religious, charitable institutions, etc. to claim full income tax exemption. In case where any trust doesn’t register for 12A, their financial transactions shall be considered taxable.

Read our article:How to Register a Religious charitable trust organizations?