You must have heard about some of Charitable Trust or Religious Trust or any Trust which is doing both. You could find that in the form of NGOs, Mandir Trusts, Gurudwaras Trusts etc. They generally receive their source of operation by way of contributions, donations etc.
They mainly work toward the betterment of the Society and serve public at large. Their causes are pious and society needs them. And that’s why in the tax system also they have been provided with a lot of benefits in order to enhance and promote them.
So, today we are going to discuss the concept of Charitable/Religious Trusts and various tax benefits which the govt. has provided them. Let’s understand them:
1. What is Charitable/Religious Trust?
Religious Trust: Religious Trusts has not been defined under the income tax act. The creation of Religious Trust is governed by the personal laws of the religion. But in general connotation, it can be deemed as the Trusts which are involved in the activities of promoting religion or particular belief.
But in reality, most of the Religious Trusts also promote the charitable causes as well e.g. education, medical facility, providing food the poor etc. and such types of Trust are called Charitable & Religious Trust.
2. How it is being created?
For this, we have to understand the types of Trusts first. Trusts can be categories mainly in two categories: (i) Private Trusts (ii) Public Trusts
The Private trusts are covered under the provisions of Indian Trusts Act, 1882 and its creation are also done as per the type of trust and as per the relevant provision of the said act.
While here we are talking about Charitable and/or Religious Trusts; these are the trust which comes under the category of Public Trusts. There is no central Act for applications in all the States. But various states such as Bihar, Madras, Madhya Pradesh, Orissa, etc. have enacted their own acts prescribing conditions and procedure for the administration of Public Trusts.
3. How to get the benefit under the Income tax act?
- For having the benefit of exemptions under the income tax act, 1961 the Charitable or Religious Trusts have to get themselves registered under the income tax act u/s 12AA.
- If the objects of Trust has been modified later on from that of which was initially declared while taking the registration, then the Trust has to apply for the modification of the Registration Certificate of such Trust. If such modification is not been done then exemptions would not be allowed. [FA, 2017]
- Also, Return must have been filed within due date.
- If Gross Receipts exceeds Rs. 2,50,000/- then the accounts of Charitable or Religious trust must be audited to get the tax benefit available to the Trusts under the act.
4. What tax benefits are available to it?
Gross Receipts from property held under Trust xxx
[including voluntary donation*]
EXCEPTIONS:
(i) If the Income was not applied to charitable/religious purposes due to reason that the AMOUNT WAS NOT ACTUALLY RECEIVED (but receivable) in the previous year then;
If the Trust declares this before the due date of filing of return that Trust would apply this income towards its religious/charitable purposes in the year in which it will be RECEIVED or immediately NEXT YEAR OF RECEIPT then such income would be allowed in the current year itself (even if this has not been spent actually). [If not utilized within such time limit it will be considered as income and no exemption would be given later on]
(ii) FOR ANY OTHER REASON; which means even if the Trust does has received its income actually but did not apply it towards charitable/religious purposes for any other reason (which may anything) then; If the Trust declares before the due date of filing of return that it would utilize this amount for charitable/religious purposes in the immediately NEXT YEAR (next year of year to which income belongs), then it would be allowed in the current year itself without actually expending the income. [If not utilized within such time limit it will be considered as income and no exemption would be given later on]
(iii) SPECIAL CASE:- As you can see above that in point (ii) amount must be expended in the immediately Next Year in which it has been earned. But there is one special case as well through which the trust can avoid the disallowability of exemption.
[IMP. NOTE: The above all 3 exception cases would be for the amount excluding 15% ad-hoc deduction which means the ad-hoc deduction would be allowed always irrespective of the expended amount and irrespective of any other condition.]
Amendment- New Explanation i.e. Explanation 3 to Section 11(1) has been introduced which provides theat amount will be considered ‘APPLIED’ only if it satisfied sections 40(a)(ia), 40A(3) & 40A(3A). [FA, 2018]
5. What is the Treatment of Capital Gains under Trusts?
- If the entire net sale consideration is utilized in new assets = then the whole of capital gains shall be exempt.
- If part of net sale consideration is utilized in new assets then;
[Amount Utilized in New Asset – Cost of Transferred (Old) Asset = Deemed as amount Utilised for charitable/religious purpose] and the excess amount would be taxable as capital gains.
6. Situations when Tax benefits are withdrawn?
A. When amount Accumulated & Set Aside for specific purpose has been transferred to general funds. Further, if any condition of Period or Purpose of such accumulation is breached later on then the exemption provided to the Trusts would be withdrawn. [In such case it will become the income of the previous year in which such default has been done.]
B. When Any of the following conditions arise:-
(i) Income is for private religious purpose and not for the public at large.
(iii) Income is for the benefit of the Specified Person* (e.g. Founder/Trustee/Relative etc.)
(iv) If funds are not invested as per the specified modes.
7. Can Charitable/Religious Trusts can do Businesses?
8. What is the treatment of Anonymous Donations?
- 5% of Total Donations; OR
- Rs. 1,00,000/-
Amount received only above this Limit would be covered by Section 115BBC and will be taxable @30%.
9. Some Important Points:
- What is the difference between Exemption u/s 11 & 12 & Deduction u/s 80G?
The Exemption u/s 11 & 12 is allowed to the Trust towards the income which has been applied for the object of the Trust. While Deduction u/s 80G is allowed to the Doner who is giving the Donation to the such Charitable/Religious Trust (which has also taken 80G Registration).
- Is it necessary that money should have been actually spent for claiming exemption u/s 11 & 12?
No, If any liability for an expenditure has been incurred then such expenditure would be considered as the application of income.
- Can Depreciation be also claimed by Trusts on its Assets?
No, If any trust has considered the amount spent on acquisition of assets as application of income then on such assets no depreciation would be allowed.
4 thoughts on “Charitable/Religious Trusts & Institutions – Simplified”
Excellent and very helpful as usual
Amazing work. Such a complex chapter in such a great and easy language. Thank you so much. !
Preparing for CA Final. This helped me to revise quickly. thanks a lot
Amazing yet precise Explanation. This chapter need more explanation in many matters. Thanks so much Nitesh 🙂 Keep it best