Are you aware that religious/charitable deeds through donations or by performing those activities can help you save tax? Section 80G of the Indian Income Tax Act lays down provisions for the same. According to 80G, you can subtract your donations to State and Central Relief Funds, NGOs, and different charitable institutions to reach your taxable income.
To promote the activities of charitable and religious institutions, the Indian Government offers various tax rebates under Section 11 of the Income Tax Act. Nevertheless, they are only available for exclusive types of income, and the entity must meet specific criteria to claim them. Keep reading to know more.
Overview of Charitable Trusts
The term ‘Charity’ signifies altruism in thought and action. It encompasses the concept of prioritizing the needs of others over one’s own, as exemplified in the Supreme Court’s decision in Andhra Chamber of Commerce [1965] 55 ITR 722 (SC).
Charity constitutes selfless, voluntary aid, either in kind or money, to the needy. Therefore, there are various non-profit entities and Non-Governmental Organizations (NGOs) that continuously work on charitable tasks by accumulating funds worldwide through the establishment of trusts or institutions.
Trusts can be formed for religious purposes, charitable purposes, or both.
Endeavors of such institutions play a key role in encouraging economic development and the social welfare aims of the Government. Their outstretched and more localized approach aids in recognizing the needy and extending a supporting hand. For this reason, the Government has offered various tax incentives and exemptions to charitable institutions, along with the advantage of Section 80G to individuals making donations to these trusts or institutions.
Tax Exemption for Charitable Trust
A Trust comprises an obligation annexed to the ownership of property and emanating from a confidence reposed in and acknowledged by the owner, pr approved and declared by him, for the advantage of another. Charitable Trusts and Section 8 Companies are qualified for tax exemption under Sections 11, 12A, 12, 12AA, and 13 of the Income Tax Act. Charitable purpose comprises relief of the poor, preservation of the environment, preservation of monuments or places or objects of historic or artistic interest, medical relief, education, and the progress of any other object of general public use. This article reviews the tax exemption for Charitable trusts in India.
1. Charitable Trust Conducting Business
There is no restriction on a charitable trust from carrying on business. The income from a business carried on by a charitable trust shall also be eligible for tax exemption if specific criteria are met. Additionally, any income of a charitable trust shall not be eligible for tax exemption unless the business is incidental to the achievement of the objects of the trust, and independent books of account are kept pertaining to such business. For example, suppose a charitable trust is set up for medical relief. In that case, the running of a hospital or dispensary, or a nursing home, or the manufacturing of medicines shall be regarded as a business incidental to the aim of the charitable trust.
2. Trust Claiming Tax Exemption under Section 10
Institutions and trusts created for the promotion of scientific research, sports, khadi and village industries, specific professions, education, etc., or as hospitals and notified religious or charitable institutions, are eligible for complete exemption from tax under Section 10 of the Income Tax Act.
3. Trust Claiming Tax Exemption under Section 11
Section 11 enumerates that any income, gain, or profit sourced from property held under trust or other legal obligation entirely for charitable and religious purposes shall not be incorporated in the total income or the institution or trust in so far as such income is used or gathered for application to such purposes.
4. Trust Qualified for Tax Exemption
The specified charitable or religious trusts are liable to an exemption under section 11 and section 12 on the satisfaction of specific conditions:
- Trusts formed before 1.4.1962 in part only for religious or charitable purposes and utilizing (or accumulating) their income for such purposes in India.
- Trusts formed on or after 1.4.1952 for the charitable purpose of encouraging international welfare in which India is concerned, endorsed by a General or special order of the Board, and using their income for such objectives outside India.
- Trusts created entirely for charitable or religious objectives and utilizing their income for such purposes in India.
- Trusts built entirely for charitable or religious purposes and using their income for such objectives in India.
- Trusts formed before 1.4.1952 for religious or charitable purposes, endorsed by a general or special order of the Board, and utilizing their income to such objectives outside India.
- Charitable trusts formed for the benefit of scheduled castes, backward classes, tribes or women and children.
Other specified conditions are given under:
- The trust should be registered with the Commissioner of Income Tax as a charitable trust that is qualified for exemption under the Act. The registration shall be done as per the guidelines present in Section 12A of the Act.
- The income of the trust should not be used for the benefit of the settlor or any individual who can be regarded as a close relative of the settlor.
- The property of the trust should be bound by a trust deed or another legal obligation.
- An exemption will be present specifically for the portion of the income which is used towards religious or charitable purposes.
- The trust should deposit the return of the income if the trust’s income surpasses the basic exemption limit. The due date for submitting the return differed based on the circumstances of the trust.
- The purpose of owning the property should be religious or charitable. The trust should not have been formed for the advantage of any specific caste group or religious community.
- If the trust’s income exceeds the basic exemption limit, the trust should compulsorily submit the books of accounts for audit. Assessments may mark that in the content, income pertains to the earnings of the trust before permitting the exemption provided by the Act to charitable trusts.
- The trust may earn revenue which is amassed towards application in the future. In such instances, the income gathered towards a future application should be invested separately. The mode of investment should adhere to the provisions of the Act.
Anonymous Donations
The term “anonymous donation” is described to signify any voluntary contribution, where the person obtaining such contribution does not keep a record comprising the identity of the person making such contribution, indicating the address and name of the person, and such other details as may be recommended. Such anonymous donations shall be taxed at 30%.
Bottom Line
Charitable trusts in India gain from significant tax exemptions under the Income Tax Act of 1961 if they follow the stipulated conditions. Trustees need to keep compliance with accounting, trust registration, and application of income to charitable purposes to maintain their tax-exempt status. Frequent audits and adherence to the provisions of the Act will help reduce risks associated with potential taxation.
Related Service
