Income Tax Provisions & Exemptions in case of Charitable Trust and Religious Institution

In India, Charitable and Religious Trusts enjoy certain Income Tax Provisions and Exemptions in case of Trust under the Income Tax Act. These exemptions and provisions are designed to encourage and support the activities of these Trusts.

1. Exemption from Income Tax:

Charitable and religious trusts are exempt from income tax under section 11 of the Income Tax Act, 1961. This means that the income earned by these trusts is not subject to income tax, provided the income is used for charitable or religious purposes.

2. Accumulation of Income:

Charitable trusts are allowed to accumulate income for a maximum of five years, if such accumulation is for charitable purposes. However, the accumulated income must be applied for charitable purposes within five years.

3. Registration under Section 12A:

Charitable and religious trusts can apply for registration under section 12A of the Income Tax Act, which grants them tax exemption on income earned for charitable purposes.

4. Exemption from Capital Gains Tax:

Charitable and religious trusts are exempt from capital gains tax if they sell a capital asset and use the proceeds for charitable purposes. This exemption is provided under section 11(1A) of the Income Tax Act.

5. Donations to Charitable Trusts:

Donations made to charitable trusts are eligible for deduction under section 80G of the Income Tax Act. This deduction is available to individuals and businesses who make donations to charitable trusts.

6. Exemption from Wealth Tax:

Charitable and religious trusts are exempt from wealth tax under section 5(i) of the Wealth Tax Act, 1957.

However, it is important to note that these exemptions and provisions are subject to certain conditions and restrictions, and it is advisable to consult a tax expert or a chartered accountant to understand the specific requirements and compliance obligations for charitable and religious trusts.

[A]. Income Tax Provisions For A “Charitable & Religious Trust”

1. Maintenance of Books of Account

Though there is no provision under section 44AA compelling the charitable trust for maintenance of accounts, however, section 80G(5)(iv) requires maintenance of regular accounts of receipts and expenditures only.

2. Application for Permanent Account Number

The Income—Tax Act specifically lays down a mandatory provision for a trust to make an application for allotment of permanent account number to the Assessing Officer in form number 49A of Income-tax Rules.

Not making an application for permanent account number by the trust or institution makes it liable for being penalised upto Rs. 10000 for the default. It should, therefore, make an application immediately on registration of trust or institution.

3. Application for Tax Deduction Account Number

The Trust or Institution should make an application for allotment of tax deduction account number to the Assessing Officer or the prescribed authority, in form number 49B of Income-Tax Rules immediately on registration of the trust or institution and quote the same on all the challans for payment of sums under section 200, on all the TDS certificates and all the returns delivered under section 206, 206A and 206B. A penalty of Rs. 10,000/- has been prescribed by section 272BB in case of failure to do so.

4. Audit Where Necessary

The accounts of the trust should be audited for such accounting year in which its income without giving effect to the provisions of section 11 and 12, exceeds [the maximum amount which is not chargeable to income tax. The audit report has to be in Form No. 10B.

5. Filing of Income Tax Return Before Due-date

The public religious and charitable trust and institutions claiming exemption of their income under the provisions of section 11 of the Income-tax Act are required to file their returns of income in Form No. 3A. The Income- tax Act grants complete exemption in respect of the income derived from property held under trust or other legal obligation wholly for charitable or religious purposes, or in part only for such purposes, subject to certain conditions. The total income for this purpose has to be computed under Income-tax Act without giving effect to the provisions of sections 11 and 12. The due date for filing return in case the accounts of the trust are audited is 30th September and 31St July in all other cases. However, in case of a trust required to furnish transfer pricing report u/s. 92E, due date for filing of return will be 30th November.

It may also be noted here that where a charitable trust does not file the return of income as required by section 139(4A), it loses its exemption. A trust is also entitled to revise the returns of income tax filed by it, within the time prescribed under section 139(1), if it discovers that there has been an error or mistake in the original return. The revised return can be filed within one year from the end of the relevant assessment year.

Similar principles apply, so far as may be, to educational and medical institutions, scientific institutions, notified trusts, trade unions, news agencies, etc. These institutions are now required to file their returns of income if their income (without giving effect to exemptions under section 10) exceeds the maximum amount not chargeable to income-tax [Section 13 9(4C)]. Failure to furnish the return of income attracts penalty under the Act. The return of income will not be considered as defective if the certificate for the tax deducted at source has not been furnished along with the return of income due to the default of the payer in not furnishing such certificate. The certificate is, however, required to be produced within two years from the end of the assessment year. [Explanation to section 139(9)].

[B]. ‘Exemption’ Provisions for A “Charitable & Religious Trust”

Trusts and institutions established for charitable and religious purposes may be notified by the Central Government in the Official Gazette, so that their income is completely exempted from tax. In considering such cases, the Central Government will have regard to the objects of the trust/institution and its importance throughout Indian State or States. The eligible trust is required to make an application for grant/renewal of exemption on year to year basis and the exemption is allowed for assessment year/years as notified by the Central Government for such periods not exceeding five years including an assessment year or years commencing before the date on which the notification is issued.

1. Conditions for availing exemption

Requirements/conditions for availing exemption under the Income-tax Act  are as under:

1. Exemption under section 11 (1)(a) is available only to trust/institution which holds the property (from which income is derived) in trust wholly for charitable or religious purposes. It means that all objects of the trust should be for charitable or religious purposes.
2. It is necessary that the property settled upon trust is held in trust. It would not be sufficient that the income is held in trust.
3. The creation of trust must be wholly for charitable purposes or wholly for religious purposes. It should not be created for the benefit of any particular religious community or caste.
4. The creation of the trust should not be for carrying on business for profit. The objects of the trust should be such as those which are charitable within the meaning of section 2(15) of the Income-tax Act (i.e., relief of the poor, education, medical relief, preservation of environment, preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility).
5. The exemption is available not to the entire income from the property held in trust. It is available only to that part of the income which is applied to charitable and religious purposes in India.
6. It is necessary to ensure through the trust deed that the income of the trust and of the property is utilised for charitable purposes in India.
7. It is further necessary to ensure that the income or the property of the trust does not ensure for the benefit of the settlor (author) of the trust or his relatives as specified in the Explanation to section 13.
8. All public trusts are required to be registered with the Commissioner by making an application in Form No. 1 OA within one year from the date of creation of the trust.
9. If it is not possible to apply the whole of the income earned from the property held in trust to desired objects in the very year in which the income is earned, then such income should be accumulated or set apart for application to charitable or religious purposes in India in future years. However, it is permitted only up to 15% of the income earned in the relevant accounting period.
10. Income in the form of voluntary contribution made with a specific direction that they shall form part of the corpus of the trust is exempt from tax.