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February 5, 2021

4 Major Changes for Trust and NGO in Budget 2021

by CA Shivam Jaiswal in Budget, Income Tax

4 Major Changes for Trust and NGO in Budget 2021

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.

Finance Minister Nirmala Sitharaman proposed many new measures in the Budget 2021 to prop up the declining economy amid the Covid-19 pandemic and boost spending across sectors. Budget 2021 focused on the seven pillars for reviving the economy – Health and Wellbeing, Physical and Financial Capital and Infrastructure, Inclusive Development for Aspirational India, Reinvigorating Human Capital, Innovation and R&D, and Minimum Government Maximum Governance. Several direct taxes and indirect taxes amendments were also proposed.

Let us learn more about the changes that were brought about for Charitable Institutions in Budget 2021 in this article:

1) Set-off of deficit not to be allowed to Charitable Institutions

  • Set off of losses means adjusting the losses against the profit or income of that particular year.
  • Losses that are not set off against income in the same year can be carried forward to the subsequent years for set off against income of those years. 
  • It has been proposed that the charitable trusts shall not be permitted to claim any carry forward of losses.
  • Therefore, no set-off/deduction/allowance of any excess application of any preceding year shall be allowed while computing income required to be applied or accumulated during the previous year by such institutions.

2) Corpus Contributions to be exempt only if invested

Voluntary contributions made with a specific direction that it shall form part of the corpus shall be eligible for exemption only if it is invested/ deposited in modes specified under Section 11(5) maintained specifically for such corpus. Further, the amount spent from such corpus shall not be considered as an application against the mandatory 85% application of non-corpus income.

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

The modes in which income shall be accumulated for specific purpose are:

  • 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

3) Amount applied out of loans not to be considered as an application of Income

  • It has been proposed that utilization of borrowed money shall not be considered as an application of income for charitable or religious purposes.
  • However, when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as an application in the previous year in which it is repaid.

4) Exemption to educational or medical institutions having annual receipt of up to Rs. 5 crores

  • Section 10(23C) of the Income Tax Act provides for exemption of income received by any person on behalf of different funds or institutions etc. specified in different subclauses.
  • Sub-clauses (iiiad) of clause (23C) of the section 10 provides for the exemption for the income received by any person on behalf of university or educational institution.
  • The exemptions under are available subject to the condition that the annual receipts of such university or educational institution do not exceed the annual receipts as may be prescribed.
  • Similarly, sub-clauses (iiiae) of clause (23C) of the section provides for the exemption for the income received by any person on behalf of hospital or institution as referred to in that sub-clause.
  • The exemptions under the said sub-clause are available subject to the condition that the annual receipts of such hospital or institution do not exceed the annual receipts as may be prescribed.
  • The prescribed limit for these two sub-clauses was Rs 1 crore as per Rule 2BC of the Income-tax Rule.
  • The said limit is proposed to be increased to Rs. 5 crores.

COPY OF BUDGET MEMORANDUM JUSTIFICATION OF CHANGE

Rationalisation of the provision of Charitable Trust and Institutions to eliminate possibility of double deduction while calculating application or accumulation

Exemption to funds, institutions, trusts etc. carrying out religious or charitable activities is provided under clause (23C) of section 10 of the Act and sections 11 and 12 of the Act. Section 12A of the Act, inter alia, provides for procedure to make application for the registration of the trust or institution to claim exemption under section 11 and 12. Section 12AB is the new section which comes into effect from the 1st April, 2021.

Under the existing provisions of the Income-tax Act, 1961, corpus donations received by trusts, institutions, funds etc. are exempt as follows:

a) Explanation to third proviso to clause (23C) of section 10 provides that income of the funds or trust or institution or any university or other educational institution or any hospital or other medical institution, shall not include income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus.

b) Clause (d) of sub-section (1) of Section 11 provides that 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 trust or institution.

These entities are not allowed to accumulate more than 15% of their income or accumulate for specific purpose up to 5 years, other than corpus donations referred above. Instances have come to the notice where the these entities claim the corpus donations to be exempt and at the same time claim their application as part of the mandatory 85% application from income other than such corpus. This results in a situation where the corpus income has been exempted and its application has been claimed as application against the mandatory 85% application of non-corpus income.

Instances have also come to the notice where these entities take loans or
borrowings and make application for charitable or religious purposes out of the proceeds of loans and borrowings. Such loans or borrowings when repaid, are again claimed as application. This results in unintended double deduction.

Both these situations, at times, also result in paper loss which is claimed by the assessee as carry forward resulting in unintended short application (less than 85%) in following years.

To ensure that there is no double counting while calculating application or accumulation, it has been proposed that-

a) Voluntary contributions made with a specific direction that it shall form part of the corpusshall be invested or deposited in one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus.

b) Application out of corpus shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C) and clauses (a) and (b) of section 11. However, when it is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus from the income of the previous year, such amount shall be allowed as application in the previous year in which it is deposited back to corpus to the extent of such deposit or investment.

c) Application from loans and borrowings shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C) and clauses (a) and (b) of section 11. However, when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as application in the previous year in which it is repaid to the extent of such repayment.

d) Clarify in both clause (23C) of section 10 and section 11 that for the
computation of income required to be applied or accumulated during the previous year, no set off or deduction or allowance of any excess application, of any of the year preceding the previous year, shall be allowed
These amendments will take effect from 1st April, 2022 and will accordingly apply to the assessment year 2022-23 and subsequent assessment years.

The new provisions will come to effect from 1st April 2021.

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