Income Tax Taxation

Provisions Under Section 11 of the Income Tax Act

Any income earned by a Charitable or Religious Trust is exempted from the purview of taxation under Section 11 of the Income Tax Act. This section provides that such charitable trusts shall incur their income from the activities that are incidental for the attainment of the main objectives of the trust or institution. Trust/Institution is also required to maintain separate books of accounts of the business with complete details of income and its utilization.

Indian Income Tax Laws provide a number of benefits in tax liability to an assessee for doing charitable and compassionate deeds. Section 80G of the Income Tax Act 1961 plays a significant role in promoting charitable trust as it provides the deductions in the total taxable income of an assessee who makes a certain amount of donation to central and state relief funds, NGOs, or other recognized charitable institutions.

Deduction under section 80G can be availed up to 100% or 50% either with or without restriction. Certain other exemptions that can be claimed by charitable or religious trusts are explained in brief henceforth.

Charitable Trusts- An Overview

Charity is a selfless and voluntary act either done in cash or kind. There are many Non-Government Organizations (NGOs) or Not-For-Profit Organization (NPO) operating in India who raises funds from all over the world in the form of charity by forming either institution or trust.

These institutions play a significant role in attaining the social welfare objectives of the Government and promoting economic development for the entire society. With the help of their approach, needy are identified, and these institutions lend a supportive hand. For this reason, Indian Tax laws provide various incentives and exemptions to charitable trusts.

Exemption Under Section- 11

Subject to the provisions of Sections 60 to 63 (Clubbing of Income), following income incurred by a charitable or religious trust shall not form part of its total income:

1. Income from property used wholly for charitable or religious purpose: As per section 11(1)(A), income incurred by the charitable trust from the property held under the trust is used wholly for the charitable purpose shall be exempted up to:
2. The extent of such income is applied to the charitable purpose

AND

• In case the income is not utilized for these charitable purposes but is accumulated for charitable purposes, then, in that case, 15% of such income is exempted from tax liability.

• Income from property used partly for the charitable or religious purpose: As per section 11(1)(B), income incurred by the charitable trust from the property held under the trust is partly utilized for the charitable purpose shall be exempted up to:

• The extent to which such income is applied for charitable purposes provided that such trust shall be created before the commencement of the Income Tax Act, i.e., 01.04.1961.

AND

• In case the income is not utilized for these charitable purposes but is accumulated for the charitable purposes then also such income shall not form part of the total income up to 15% of such income

• Income from property held under Trust that is applied for charitable purposes outside India: As per section 11(1)(C)^[1],  income derived from the property held under trust is utilized for charitable purposes only that promotes the International Welfare shall be exempted to the extent to which such income is applied for charitable purposes outside India. Such trust shall be created on or after 01.04.1952.

In case the trust is created before 01.04.1952, such part of the income shall be exempted from tax, which is utilized for promoting charitable and religious purposes outside India.

• Voluntary Contribution: As per section 11(1)(D), income derived from the voluntary contribution that comes with an instruction that it shall form part of the corpus of the trust or institution is fully exempted, i.e., up to 100% with no conditions of accumulation.

Restrictions on the exemption in case of donation made by an exempted entity to another exempted entity: As per the current provisions of section 12AA, any donation made by one trust to another trust is said to be utilizing the income as per its object. However, a donation made with an instruction that it shall form part of the corpus of the trust is considered to be the application of income in the hands of the donor but is not considered as income in the hands of the recipient. 

Computation of Exemption under section 11 of Income Tax

Following is the step to find out the exemption of income in case of Charitable or Religious Trust under section 11:

1. Computation of Income: Calculate the total taxable income of Trust or Institution.
2. Exemption: Following are the exemptions that can be availed during the calculation of tax liability of charitable trust:
3. 15% of the income is exempted from the tax if such income is incurred from property held for charitable or religious purposes.
4. Remaining 85% of income is exempted from the tax if such income is applied for charitable or religious purposes.
5. In case such income is not applied for charitable or religious purposes during the previous year, it can be accumulated or set apart for application in the future.

Computation of Income from property held by a charitable trust

Any amount deducted as a tax at source (TDS) shall not be considered as a part of the income of the trust. Voluntary contributions or donations made are deemed to be the part of taxable income derived from property held under trust. Although the voluntary contribution is not considered as part of the income of the trust in case, such contribution is made with an instruction that such contribution shall form part of the corpus.

The main responsibility of the assessee is to prove and show that any contribution was made with an instruction that they shall form part of the corpus of the trust. Audited accounts showing them as a part of the corpus cannot be said that the assessee has furnished requisite evidence.

Capital Gains of Charitable Trust

In case the charitable or religious trust hold any capital asset and such asset was held under trust wholly for charitable purposes, is transferred and the whole or part, as the case may be, net consideration is utilized for acquiring another capital asset which has to be held for charitable purposes is deemed to be applied to the charitable purpose. Provided that:

1. In case the whole consideration is used to buy a new capital asset, the whole amount of such capital gain is deemed to be applied for charitable purposes, and such capital gain is exempted wholly from taxation.
2. In case the part consideration is utilized for acquiring the new asset, then the difference between the cost of new assets and the cost of the transferred asset will be deemed to be an exempt capital gain.

Taxability on Charitable Trust

Following is the taxability on various categories of income for charitable trust:

• Donations: Any voluntary contribution made with the specific direction of forming it the part of the corpus of the trust is fully exempted. And any voluntary contributions made without such instruction forms part of the income from property held under trust.

• Anonymous donation: Any donation made without revealing its identity is taxed at the rate of 30% provided such donation shall exceed the higher of:

1. 5% of the total donations of trust

OR

• INR 100000

And if any donation is made to the charitable or religious trust is taxable in the manner as if it forms part of the income from property held under trust.

• Income from property held under trust for a charitable purpose:  Such income is fully exempted from tax in case such income is utilized for charitable or religious purposes. In case the income is accumulated or set aside for the application towards the charitable or religious purposes is exempted up to 15% of the income.

• Income from property held under a trust created for promoting international welfare: Fully exempted, provided the central board of direct tax shall through general or specific order restrain such income from forming part of total income.

• Capital Gains of charitable trust: In case the entire capital gain is utilized for acquiring another capital asset for the sole purpose of charitable or religious is fully exempted from tax. Although in the case of part utilization of such proceeds from the transfer, only the capital gain utilized in excess of the cost of an asset transferred is exempted.