“The word ‘Charity’ connotes altruism in thought and action. It involves an idea of benefiting others rather than oneself” Supreme Court in the case Andhra Chamber of Commerce [1965] 55 ITR 722 (SC).
Charity is a selfless voluntary help either in money or kind to the needy. Hence, there are various Non-Governmental Organizations (NGOs) and non-profit entities constantly working on charitable activities by raising funds all over the world by forming either an institution or trust.
Trusts can be created for charitable purposes or religious purposes or both.
Efforts of such institutions play a significant role in promoting economic development and the social welfare objectives of the Government. Their outreach and more localised approach help to identify the needy and lend a supporting hand. For this reasons, the government has provided various tax incentives and exemptions to charitable institutions, as well as benefit of Section 80G to persons providing donations to these institutions/trusts.
Income Tax on Charitable Institutions or Trusts
Category of income | Income subject to tax | Taxability |
Donations/voluntary contributions | Voluntary contributions with a specific direction to form part of corpus of trust or institution | Exempt* |
Voluntary contribution without such specific direction | Forms part of income from property held under trust, exemption is available on such donations subject to certain conditions | |
Anonymous donations i.e., donations where donee does not maintain record of identity/any particulars of the donor | Donation exceeding higher of: i) 5% of total donations received by trust or ii) Rs 1,00,000 | Excess anonymous donation taxed at 30% |
Anonymous donation received by
| Taxable in the same manner as voluntary contributions (without specific direction) as above | |
Income from property held under trust for charitable or religious purpose | Income applied for charitable or religious purpose in India | Exempt* |
Income accumulated or set aside for the application towards charitable or religious purpose in India | Exempt* to the extent of 15% of such income. This means at least 85% of income from property to be applied for charitable and religious purpose in India as above and balance 15% can be accumulated or set aside. [i.e., It can be claimed as exempt even if the said income is not spent] | |
Income from property held under trust created for charitable purpose which tends to promote international welfare in which India is interested | CBDT either by general or special order has to direct that such income shall not be included in the total income of trust | Exempt* |
Capital gain from asset held under trust in whole | Net consideration is utilised fully for acquiring another capital asset | Entire capital gain is deemed to have been applied for charitable and religious purpose and hence is exempt* |
Net consideration is utilised partially for acquiring another capital asset | Capital gain utilised in excess of cost of old asset transferred is considered to have been applied for charitable and religious purpose and is exempt* |
Eligibility for Exemption
- The trust should be registered with the Commissioner of Income Tax as a Charitable Trust which is eligible for exemption under the Act. The registration shall be made in accordance with the guidelines available in Section 12A of the Act.
- The property of the trust should be bound by a trust deed or another similar legal obligation.
- The purpose of holding the property should be a charitable or religious purpose.
- The trust should not have been created for the benefit of any particular religious community or caste group.
- The income of the trust should not be applied for the benefit of the settlor or any person who can be considered as a close relative of the settlor.
- An exemption will be available exclusively for the portion of the income which is applied towards charitable or religious purposes.
- In case the income of the trust exceeds the basic exemption limit, the trust should mandatorily submit the books of accounts for audit. Assessees may note that in this context, income refers to the earnings of the trust prior to allowing the exemption offered by the Act to charitable trusts.
- The trust should submit the return of income if the income of the trust exceeds the basic exemption limit. The due date for filing the return varies depending on the circumstances of the trust.
- The trust may earn income which is accumulated towards application in the future. In such cases, the income which is accumulated towards future application should be invested separately. The mode of investment should comply with the provisions of the Act.
How Should Income be Applied to be Exempt?
Suppose the income of trust from property held under trust for charitable or religious purpose is to be claimed as exempt. In that case, a trust is required to apply at least 85% of its income to charitable or religious purposes in India. As per the definition provided under tax provisions, charitable purpose includes the following:
- Relief of the poor
- Education
- Yoga
- Medical relief
- Preservation of environment
- Advancement of any other object of general public utility.
In addition, income utilised for the purchase of capital assets, repayment of a loan for the purchase of capital assets, revenue expenditure and donation to other trust to the extent of 85% registered under Section 12AB / Section 10(23C) shall also be treated as applied for charitable purposes and hence exempted from tax.
The expression ‘religious purpose’ has not been defined under the Act. Religious purposes are necessarily associated with religion and a matter of faith with individuals or communities. Religious purpose includes the advancement, support or propagation of religion and its tenets. The income of a religious trust or institution is entitled to exemption, though it may be for the benefit of a particular religious community or caste.
Taxation of Trusts
S. No. | Circumstance | Tax Rate |
| 1 | The trust earns income for which an exemption is not available under the Act. | The income is taxed using the following slab-rate: Income-Tax:
|
| 2 | The trust has forfeited its status as a charitable trust on account of violating the conditions prescribed by the Act. | The trust should pay tax on the maximum marginal rate. For Assessment Year 2020-21, the rate is 42.744%. The rate is applicable only on that component of the income which can be attributed to forfeiture of the charitable status. For the remaining portion of the income, the AOP tax-rates (mentioned in the preceding entry) should be used. |
| 3 | The trust has converted itself into a non-charitable trust. | The maximum marginal rate of 42.744% should be applied on Accreted Income. Accreted Income refers to the amount of aggregate fair market value of total assets as reduced by total liabilities. This tax will be in addition to the regular Income Tax paid by the trust. |
Documents Required for Registration under Section 80G and 12AB
Documents for 80G Registration: To obtain an 80G Certificate, a trust needs to provide the following documents
- PAN card
- List of donors
- MoA and Registration Certificate
- Certificate of Incorporation
- NOC
- Documents related to IT returns, Bank Statements and Book of Accounts of the last 3 years
- Form 10G
- A complete list of welfare activities
- Trust Deed, in case the NGO is a Trust
- Copy of the latest utility bills such as Water or Electricity Bills or House Tax Receipt
- A detailed list of the Board of Trustees
Documents required to obtain 12AB Certificate:
- Form 10A
- PAN card
- Documents for the creation of the Trust or NGO
- Financial statements for the three consecutive preceding years
- In the case of Section 8 Company, a Certificate of Incorporation and copies of MoA & AoA
Income deemed to have been applied
- Where Income is not received: If the whole or any part of the income has not been received during the previous year, then income can be deemed to have been applied for that year and trust should apply such income for such purposes during the previous year in which it is received or during the previous year immediately following the previous year of receipt; or
- Where Income received is not spent: For any other reason, apply such income for such purposes during the previous year immediately following the previous year in which the income was derived.
Such option is to be exercised in Form 9A to be furnished electronically by the trust within the time allowed for filing return of income u/s 139(1).
Income Tax Return Filing for Trust
Any Trust with a gross total income of more than the basic exemption limit is required to file income tax returns mandatorily. Also, the following types of trusts are required to file an ITR return mandatorily, irrespective of gross total income:
- Research Association
- News agency
- Association or institution.
- Fund or institution
- University or other educational institution
- Mutual Fund
- Securitisation trust
- Investor Protection Fund
- Core Settlement Guarantee Fund
- Venture capital company or venture capital fund
- Trade union
- Body or authority or Board or Trust or Commission
- Infrastructure debt fund
- Business trust
How to File Income Tax Return for Trust
The income tax return of Charitable Trusts must be filed using ITR 5 return filing or ITR 7. In case the Trust is required to file an income tax return due to taxable income being in excess of the basic exemption limit, then ITR 5 can be filed. In case the Trust is required to file income tax return mandatorily under Sections 139(4A) or139(4B) or 139(4C) or 139(4D) or 139(4E) or139(4F) of the Income Tax Act, then ITR 7 must be filed. It is mandatory for all trusts to e-file income tax return. In case the Trust is required to get its accounts audited, then the income tax return must be e-filed along with the Digital Signature of the Chartered Accountant who is responsible for carrying out the audit. Learn about the concept of Tax Audit turnover in Income Tax.
Due Date for Filing Trust Tax Return
- September 30 if the Trust is required to get its accounts audited under the Income Tax Act or under any other law.
- November 30 if the Trust is required to file Form No. 3CEB. Form 3CEB will be required if the trust has entered into certain types of related party transactions.
- July 31 if the Trust does not need to get its accounts audited.
FAQs
Should the trust deed be in writing?
The trust deed should be in writing and should carry the signatures of the trustees and author of the trust.
When can a donor claim a deduction under section 80G of the Income Tax Act?
A donor can claim a deduction under section 80G of the Income Tax Act for donations to a registered charitable institution or NGO.