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October 15, 2020

Know all about Income Tax on Trust & NGO

by shivam jaiswal in Income Tax

Know all about Income Tax on Trust & NGO

Charitable organization is a kind of institution or a business that falls under the category of NPO or non-profit organization and can be based on providing educational, religious or public interest activities. There are different kinds of activities of the charitable organizations. Some of them offer relief to the needy people who are in distress, poverty or are underprivileged.

There are also some who are related to educational, scientific or religious affiliations. Some of the activities of charitable organization also include the creation of public building and monuments and take care of them. All these are done by the donations that a charitable organization gets. Due to their distinct organisation and objective entire income of such charitable or religious trusts are taxed as per the provisions of section 11-13 of the Income Tax Act, 1961, which provides for various tax benefits to them. Let us learn about this in detail below:

What do you mean by a trust?

A trust is an association/ union of members constituted for a charitable or religious purpose not intending to do any commercial activity. As per the Trust Act, a Trust is an arrangement where a person transfers some property to another person within his acceptance for the benefit of any third person or a group of persons or society. Trust in India can be registered in any of the two ways i.e. by forming a Public Trust or a Private Trust.

  • Private Trust: A trust formed with the fundamental goal of protecting the interest of its beneficiaries who are limited in number or limited to a specific group.
  • Public Trust: A trust formed to benefit a large group or the general public. It captures the interest and benefit of public groups and is generally formed for scientific, religious, educational or charitable purposes.

What benefit under income tax is provided to trusts?

Trust formed for charitable or religious purposes which are not intended to do commercial activities are allowed various benefits under the Income-Tax Act, inter-alia, exemption under section 11.

What do you mean by religious or charitable purpose?

The term religious purpose is not defined under the Income-Tax Act. Section 2(15)​ of the Income Tax Act defines “charitable purpose” to include relief of the poor, education, 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.

However, 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, fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless:

  • such activity is undertaken in the course of ​​carrying out of such advancement of any other object of general public utility and
  • the aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year

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How are voluntary contributions received by a trust formed for charitable or religious purposes taxed?

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, shall not be included in the total income of the previous year of the person in receipt of the income. Basically, it means that such income shall be exempt in the hands of a trust formed for charitable or religious purposes.

How is income from property held for charitable or religious purposes by is trust, taxed?

According to Section 11 of the Income Tax Act, the following income from property held for charitable or religious purposes shall not be included in the total income of the previous year

  • 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 15% of the income from such property

In simple words,

15% of gross receipts from such trust property – Exempt

85% of gross receipt from such trust property

  • Income Applied for Charitable Purposes in India – Exempt to the extent to which applied for the following purposes:
    1. Purchase of capital asset
    2. Repayment of loan for purchase of capital asset
    3. Revenue Expenditure
    4. Donation to trust registered u/s 12AA or u/s 10(23C)
  • In case whole or part of income is not received during that year in which it is derived. Income deemed to be applied for charitable purpose in India and exempt shall be:
    1. Income is applied for charitable purpose in India in the year of receipt or in the immediate succeeding year.
    2. Assessee submits a declaration to the AO on or before the due date of filling of return as per section 139(1) that such income shall be applied for such purpose in the year of receipt or succeeding year.
  • In any other case exempt income shall be:
    1. Such income is applied in above mentioned charitable purposes in the immediately succeeding year.
    2. Assessee submits a declaration to the AO on or before the due date of filling of return as per section 139(1) that such income shall be applied for such purpose in the immediate succeeding year.

What are the modes in which income shall be accumulated for specific purpose?

  • Investment in government saving certificate/UTI
  • Deposit in post office savings bank/scheduled bank.
  • Investment in immovable property.
  • Deposit with or investment in bonds of a public co. having main object of providing long term finance for urban infrastructure/industrial development/ residential house, in India
  • Investment in Company debentures fully and unconditionally guaranteed by Central or State Government
  • Investment or deposit in public sector company

Can exemption to a trust be withdrawn?

Any income which:

  • is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or
  • ceases to remain invested or deposited in any of the forms or modes specified, or
  • is not utilised for the purpose for which it is so accumulated or set apart during the period or in the year immediately following the expiry thereof,
  • is credited or paid to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of section 10(23C),

shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.

What is the tax implication when a capital asset, being property held by a trust is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset?

In such situations, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes (thus exempt) to the extent specified as follows:

  • Where Cost of new asset ≥ net consideration from asset sold, then entire capital gain is exempt
  • Where Cost of new asset < net consideration from asset sold, then Capital Gains Exempt shall be Cost of new asset (-) Cost of old asset

What is the tax rate for a trust?

A trust is chargeable to tax as per the slab rates which are applicable to an individual (not being a senior citizen or super senior citizen).

Surcharge shall be as follows:

  • The amount of income-tax shall be increased by a surcharge at the rate of 10% of such tax, where total income exceeds Rs 50 lakhs but does not exceed Rs 1 crore. However, the surcharge shall be subject to marginal relief.
  • The amount of income-tax shall be increased by a surcharge at the rate of 15% of such tax, where total income exceeds Rs 1 crore. However, the surcharge shall be subject to marginal relief.

Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by health and education calculated at the rate of 4% of such income-tax and surcharge.

What do you mean by an anonymous donation?

“Anonymous donation” is:

  • It is a voluntary contribution referred to in section 2(24)(iia).
  • The person receiving such contribution does not maintain a record of:
    1. the identity indicating the name and address of the person making such contribution; and
    2. such other records as may be prescribed.

How are “Anonymous donations” taxed?

Where the total income of a trust or an institution includes an income by way of any anonymous donations, the income tax payable shall be the aggregate of:

  • the amount of income-tax calculated at the rate of 30% on the aggregate of anonymous donations received in excess of the higher of the following:
  • 5% of the total donations received by the assessee or
  • Rs. 100,000 and
  • the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of anonymous donations received in excess of the amount referred to the above point, as the case may be.

Therefore, if such amount of donation which is not treated as anonymous donation is not applied like any other income, it will become taxable.

When shall anonymous donations shall not be taxable?

Anonymous Donations are not taxable in the following situations:

  • Where donations are received by trust established wholly for religious purpose (no charitable purpose)
  • In cases when such religious/charitable trust also run a school/medical institution/educational institution etc and the donations are received with specific direction that they are for such school/institution then such donations shall be taxable

When shall exemption to trust formed for charitable or religious purposes taxed not be available?

No exemption is available to the following incomes of trust/institution:

  • Entire income from property held under trust for private religious purpose which does not benefit the public
  • Entire income of charitable Trust or institution established for the indirect benefit of any particular religious community or caste
  • Entire income, if income (wholly or partly) and property of the charitable or religious trust or institution is used for the benefit of specified person
  • Income of charitable / religious trust is not invested as specified
  • Value of medical or educational services made available by any charitable or religious trust running a hospital medical institution or educational institution to specified person
  • Any income being profits and gains of business unless business is incidental to the attainment of the objectives of the trust / institution and separate books of account are maintained in respect of such business

What Income Tax Returns (ITR) does a trust have to file?

  • ITR – 5: ITR form to be filed by trust, individual, company or other persons who are not required to furnish an income tax return under Section 139 4A, Section 139 4C, Section 139 4D or Section 1394E.
  • ITR- 7: ITR form for trust, individuals or companies abided to file income tax under Section 139 4A ,4B,4C or 4D.

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