Taxation of Charitable and Religious Trusts

The trust is an obligation annexed to ownership and arising out of the confidence reposed in and accepted by the owner for the benefit of another. The person who re-poses the confidence is called the “author of the trust”; the person who accepts the confidence is called the “trustee” and the person who is benefitted is known as the “beneficiary”. The trusts carry out various charitable activities for the welfare of its beneficiaries. Let us discuss the taxation of charitable and religious trusts.

What is a charitable purpose?

The charitable purpose is defined in Section 2(15) of Income Tax Act, 1961 

“Charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests, and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless—

 (i)  such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii)  the aggregate receipts from such activity or activities during the previous year, do not exceed twenty percent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

 The above section implies that if the charitable activity is carried out for the advancement of general public utility and during the course of such advancement if any activity in the nature of trade, commerce or business is carried out then such receipts should not exceed 20% of total receipts.

However, if the object of trust is relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests, and wildlife) and preservation of monuments or places or objects of artistic or historic interest it will be regarded as a charitable activity regardless of incidental commercial activities.

As per explanation 1 to section 13 of Income Tax Act, 1961 the provisions of section 11 to 13 are applicable to ‘any other legal obligation’. This term is wide enough to cover religious trusts.

 INCOME OF THE TRUST EXEMPT FROM INCOME TAX

The income earned by charitable trusts is not chargeable to tax if it satisfies the conditions provided in the income tax law. In order to claim exemption, the trust has to be registered under the section 12 AA of the Income Tax Act, 1961. Section 11 of the Income Tax Act, 1961 provides for exemption of income from property held in trust.

The following are the incomes that are exempt-

1.      Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;

2.       Income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

In order to claim exemption, 15% of the total income is set apart and accumulated and 85% of the income is applied for charitable purposes.  If less than 85% of the income is applied then balance income is taxable at normal slab rates.

The following are the applications of income:

1.      Application of the amount can be for revenue or capital purposes.

2.      The number of donations to charitable and religious trusts or institutions registered under section 12AA of the Income Tax Act, 1961 and institutions registered under section 10(23C) of the Act. However, any amount paid to a trust registered under section 12 AA and section10 (23C) of the Act with a specific direction then it will not be considered as the application of income.

3.      Repayment of loan taken for construction of building and fulfillment of objects of the trust.

4.      If a trust treats expenditure on acquisition of assets as the application for charitable and religious purpose then trust cannot claim depreciation on such assets.

5.      Interest-bearing loans advanced to the students.

However, only the agricultural income and income of the funds referred to in section 10(23C) are exempt. The other incomes referred to in section 10, such as dividends are not exempt in the hands of the trust.

ACCUMULATION FOR A SPECIFIC PURPOSE

If the 85% of the total income is not applied for the objects of the trust but is accumulated or set apart for specific purposes then trust should furnish a statement in the prescribed form to the Assessing Officer, such accumulation should not exceed the period of 5 years.

The amount can be accumulated by investing in the following securities:

(i)  investment in savings certificates under the Small Savings Schemes of Government;

(ii)  deposit in any account with the Post Office Savings Bank;

(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking.

 (iv) investment in units of the Unit Trust of India

(v)  investment in any security for money created and issued by the Central Government or a State Government;

(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest thereon are fully and unconditionally guaranteed by the Central Government or by a State Government;

(vii)  investment or deposit in any public sector company:

 (viii)  investment in Gold Sovereign Bonds issued by RBI;

 (ix)  investment in immovable property.

FILING OF RETURN OF INCOME:

In order to claim exemption the trust has to get its accounts audited and file return of income within the due date prescribed under the income tax law. The due date for such trust is 30th September. The return is filed if the income of the trust exceeds Rs. 2,50,000. Form 10B and ITR 7 is required to be filed within the due date.

If the trust is involved in certain related party transactions then it has to file form 3 CEB and due date for filing return of income in such case is 30th November.