In this blog post, Harsha Asnani, student, NIRMA University, Ahmedabad writes about what are charitable trusts and how are they taxed.
Charitable purpose includes relief of the poor, education, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. In cases where the purpose of the settler is to create benefits for his or her family members and indirectly extend that benefit to the general public then such trusts cannot be termed as charitable trusts. Under the Income Tax Act, 1961, the taxes that are imposed over charitable institutions and trusts depend upon the kind of income or revenues that they receive. Section 11 – 13 of the Income Tax Act, 1961 are the major provisions according to which the taxes are imposed over the income of the trust i.e. capital gains, from house, property or any other income. Following are the types of income that trusts receive and the corresponding level of taxes that are imposed over them. Following are the different kind of incomes:
- Voluntary Contribution;
- Income from Property held under Trust;
- Capital Gains from Trust Property;
- Anonymous Property.
The income which is received through way of voluntary contributions shall be either for the corpus or otherwise will be appropriated against the expenses to compute the taxable income. In case of trusts which are registered, certain benefits of tax relaxation are given to the registered trusts. In cases where the trusts are not registered, it may lose such benefits.
Tax Exemptions under Section 10 of Income Tax Act, 1961
Under Section 10, there are certain trusts which are entitled to total tax exemption. Such trusts include those which are formed for any of the activities related to sports, education, scientific research, professions, or promotion of khadi and village based industries, hospitals etc. and are notified as charitable or religious institutions.
Tax exemptions under Section 11 of Income Tax Act, 1961
According to Section 11, any income, profits or gains obtained by a trust from a property held by the trust established wholly for the purposes of religious or charitable nature shall not be included in the total income of the trust. Since such income shall not constitute to be a part of the trust’s income, therefore, it shall not be taxed. According to section 13, there are certain situations where the tax exemptions under section 11 are not applied. Such instances include where income earned from the property held under the trust of private religious nature and does not endure benefit for the public, entire income of a charitable trust which is established for a particular religion, community or caste, income of those charitable trust whose funds do not get invested in the modes specified under section 11(5).
Tax Exemption under Section 12 of the
Incomes that are Non-Taxable
The incomes that are excluded from the computation of taxable income of trust or society are as follows:
- Income which is derived from the property that is held under the authority of trust with the purposes which are wholly charitable or religious in nature.
- Income which is kept aside to the extent that does not exceed 25% of the total income received in lieu of the property.
- In cases of charitable trusts, specifically those formed before 1st of April, 1961, income which is acquired from the property which is held partially for religious or charitable purposes within India
- In furtherance of the above case, the income which is set apart to a certain extent and which does not exceed twenty five percent of the total income.
- In cases of income that is obtained from a trust created before 1st April, 1952 for charitable purposes and spent outside India.
- Income made by way of voluntary contributions towards the corpus of the trust.
- Charitable trusts created for the benefit of any of the socially and economically backward castes such as Scheduled Castes, Scheduled Tribes or women or children.
Trusts are allowed to set apart or accumulate some of the funds from received from voluntary contributions for certain purposes. The resultant benefit obtained by the trust is that the so deducted amount is not considered as the part of previous year’s income and therefore not taxed.
Procedure for calculation of taxable income
In order to know the amount of tax that is to be imposed on the trust the first step is to know the taxable income. Income of the trust majorly includes voluntary contributions received by the trust. The part of the income which is exempted under Section 11 and 12 would not be included in the amount of taxable income. In order to get this benefit of exemption, it is necessary that the trusts registered themselves under Section 12AA. This can be done by writting an application in Form 10A within one year from the date of setting up of the trust.
Taxation of a Private Trusts
Private Trusts are those that are created for the benefit of all or any of the family members or estates or for preservation of any of the property for future purposes. The tax exemptions that are received by a trust formed for charitable or religious purpose do not necessarily get applied in the case of private trusts. Since private trusts are independent entities, their income is only available to its beneficiaries; therefore the structure of income determines the pattern in which they are taxed. The structure of taxation is of two types. In cases of specific trust, where the individual beneficiary’s share in the profit is known then the income that s in hand of the beneficiary shall be taxed. Such tax although is levied on the beneficiary but it is collected from the trustee. Whereas in cases of discretionary trust, where the income of the beneficiaries is not known, the income in the hand of trustees becomes taxable.
Taxability of certain incomes under the Income tax Act
The income obtained from the trust property is divided into three parts.
- The income which is used for charitable purposes. The first 15 percent of such income is exempted from taxation. Other 85 percent is exempted in the following manner:
- According to Section 11(1), the part of the income which is applied for charitable purposes in India is exempted for the following purposes:
- Purchase of capital asset
- Repayment of loan for purchase of capital asset
- Revenue Expenditure
- Donation received (this exemption only applies to those trusts which are registered under section 12AA or under section 10(23C).
- Income which is deemed to be applied for charitable purposes in India, is exempted if it is applied for the following purposes:
- Income which is applied for charitable purposes in India
- Submission of a declaration by the assessee to the assessing officer that the so received income shall be applied for charitable purposes
- In any other case where, the income shall be exempted only in the following cases
- Such income is applied in charitable purposes in the immediately succeeding year
- Submission of a declaration by the assessee to the assessing officer that the so received income shall be applied for charitable purposes in the immediately succeeding year
Income which is not applied for charitable purposes- According to section 11(2), such income gets exempted if it is accumulated for specific purposes in India subjected to the following conditions:
- If the assessee notifies the assessing officer that the purpose and period (not exceeding five years) of such accumulation before the assessment is completed
- Accumulated amount is deposited in the specified form.
- In case of capital gains, according to section 11(1A) the capital gains received from the transfer of property shall be taxed in two ways. Firstly, the entire capital gain can be exempted in case the cost of new asset is greater than or equal to the net consideration from asset sold. Secondly, in case if the cost of new asset is less than net consideration from the asset sold, then the extent of exemption shall be equal to the cost of new asset.
- According to Section 115BBC, in case of anonymous donations, either five percent of total of such donations or Rs. 1,00,000 whichever is higher gets exempted. The remaining income is taxable at the rate of 30 percent. There are certain instances where such income from anonymous donations is not taxed such as in case if the donation is received by a trust which is set up wholly for religious purpose and a few other exeptions.