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:
Income from property used wholly for charitable or religious purpose: As per section 11(1)(A),
incurred by the charitable trust from the property held under the trust is used
wholly for the charitable purpose shall be exempted up to:
The extent of such
income is applied to the charitable purpose
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
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.
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), 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
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
Computation of Income: Calculate the total taxable income of Trust or Institution.
Exemption: Following are the exemptions that can be availed during the
calculation of tax liability of charitable trust:
15% of the income is exempted from the tax if such income is incurred from property held for charitable
or religious purposes.
Remaining 85% of income is exempted from the tax if such income is
applied for charitable or religious
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:
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.
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:
5% of the total donations of trust
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 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.