The Income Tax Act of 1961 grants many exemptions to institutions established to advance social welfare. Any tax which is levied on such institutions is dependent on the nature of their income. Section 11 of Income Tax Act 1961 grants exemptions to income received from a trust held for charitable or religious purposes. The Income Tax Act defines ‘charitable purpose’ under Section 2(15) as “assistance to the poor and disadvantaged, education and preservation of monuments, preservation of the environment, preservation of places of historical and artistic interest, medical relief, yoga, promotion of sports and games, and advancement of any general public utility object”. The Income Tax Act for the states that “advancement of any general public utility object” shall not be considered for charitable purposes if an activity which is in the nature of commerce, trade or business and is carried on by charging a fee or cess or any other consideration regardless of the application or retention or nature of use of the income generated from such activities unless the activities are carried out for the furtherance of any objects of general public utility and the aggregate receipt derived from such activity this is not more than 20% of the total receipts in the previous year of the institution or trust carrying out the activities. In this blog, we will discuss Exemption to Trusts under Section 11 of Income Tax Act.
The term ‘religious purposes’ has not been defined under the Income Tax Act 1961. The income generated for religious purposes is generally used for advancing and propagating a particular religion and its beliefs. The income generated by a religious institution or a trust which has been used for the benefit of a specific caste or religious community shall be exempt from taxation. The Income Tax Act only provides exemptions to public trusts created for religious purposes and not to private religious trusts.
A Trust Receives or Generates Income of the Following Types:
- Income from property held under the trust for religious or charitable purposes
- Voluntary contributions or donations.
- Anonymous contributions or donations where the donee does not maintain the identity of the donor.
- Capital gained wholly from assets held under a trust.
- Income from a property which is held under the trust for charitable purposes and which looks to advance international social welfare in which India is interested.
A trust held for charitable or religious purposes must be registered under section 12 AA of the Income Tax Act 1961.
Income Exempted from Taxation Under section 11 of Income Tax Act 1961
As per section 11 of Income Tax Act 1961, the following income shall be exempted from taxation:
- Income which has been derived from any property held under the trust wholly for religious and charitable purposes and only to the extent to which such income is applied for the advancement of such purposes in India. In cases where such income is accumulated or is set apart for the advancement of such purposes in India, it shall be at most 15% of the total income derived from such property.
- Concerning trusts established before the commencement of the Income Tax Act 1961, income which has been derived from any property held under the trust partly for religious and charitable purposes and only to the extent to such income which is applied for the advancement of such purposes in India. In cases where such income is set apart for the advancement of such purposes in India, it shall be at most 15% of the total income derived from such property.
- Income derived from property held under a trust established after April 1952 and created for charitable purposes to promote international welfare and to the extent to which such income is applied for such purposes outside India.
- Income that has been derived from property held under a trust which has been established before April 1952 to the extent to which search income is applied for purposes outside of India.
- Income which has been received through voluntary contributions with specific directions that it should form part of the corpus of the institution or the trust.
- Income which has been used for revenue expenditure, purchase of a capital asset or repayment of loan taken to purchase such capital asset and donations made to the trust registered under section 12AA of the Income Tax Act 1961 shall also be exempt from taxation.
- Income which has been generated from a hospital which has been established for charitable purposes is also exempt from taxation.
- Income which has been generated by an establishment which provides any financial assistance to educational institutions like schools and other similar establishments is also exempt from taxation.
- Income which has been generated by society running a school or college or any other establishment providing education is also exempt from taxation.
Application of 85% of Income Derived from Property Held Under the Trust – Section 11 of Income Tax Act
When The Income Applied Is More Than The Income Derived.
Section 11 mandates that at least 85% of the income derived from the property held under a trust must be used for the advancement of religious or charitable purposes in India. If at least 85% of the income derived from such property hasn’t been used for such purposes due to non-receipt of whole or any part of the income offer any other reason, even then the income can be exempt from taxation in specific scenarios where it shall be deemed to have been applied for charitable purposes. At the option of the trust, any income derived, including income that has not been used for religious or charitable purposes, shall be deemed income applied for such purposes and can be claimed as an exemption. However, the same amount cannot be claimed if it has been utilised or received. In case the income which has been deemed to have been used for religious or charitable purposes has not been applied purposes one receipt of such income, then the applicant can add back the income as the income of the trust for the year when search income was derived or received. The assessee can exercise this option only before the expiry of the period allowed for the filing of a return of income as is provided under Section 139 of the Income Tax Act, 1961. To claim the exemption income, the assessee is required to file Form 9A with the assessing officer by giving the reason for such a shortfall and the value on which the amount is to be exercised.
When the Income Which Has Been Utilised Is Less Than 85% of the Income Received
If the trust receives or derives more income than what is required to be utilised in a specific year, then such trust can set aside more than 15 % of the income received or derived subject to the below-mentioned conditions:
- The trust must furnish Form 10, giving information about the period and purpose for which the income has been held for accumulation.
- The period of such for accumulation must be at most five years.
- While furnishing Form 10, the assessee must keep in mind the expiry period mentioned under Section 139 of the Income Tax Act, 1961, filing of return of income for the previous year.
- The income set apart or accumulated which
exceeds 15% of the income received or derived must be invested as follows:
- Deposits made in any account at the post office savings bank.
- Any investment made in a savings certificate as is provided for under Section 2 of the Government Saving Certificate Act, 1959 and any other certificates or securities given by the central government.
- Investment in Unit Trust of India units.
- Deposits made in an account of a cooperative society which is engaged in the business of banking or scheduled banks.
- Investment in any securities for money created by the central government or state government which has been issued by such government.
- Deposit or investment in any public sector company. Suppose the company stop being a public sector company. In that case, any investment in the shares of such company shall be treated as an investment which is eligible for a period of 3 years. Any other investment shall qualify until it is created so for payment by the particular company.
- Where the principal and interest pertaining to investment in debentures issued on behalf of or by a corporation or a company are guaranteed unconditionally and entirely by the state government or the central government.
- Investments which are made in bonds which have been issued by a financial corporation engaged in the business of providing finance for India’s industrial development and are eligible for deduction as provided in Section 36 of the Income Tax Act, 1961.
- Investments made in any immovable property except machinery or a plant.
- Deposits made with IDBI
- Investments made in bonds that have been issued by public companies which are engaged in the business of providing finance for the purchase of residential properties or urban infrastructure.
If such income as mentioned above is utilised for any other purposes than a charitable purpose or a religious purpose or remains unutilised for a period of 5 years or there is no longer in any of the modes mentioned above or is paid or credited do any trust or institution which has been registered under section 12AA or is mentioned in section 10(23C) of the Income Tax Act, 1961, then such income shall be deemed as the income in the previous year of the institution or trust during which the breach of such conditions happened. Suppose the circumstances are such that they are beyond the control of the trust or institution. In that case, income can be applied for purposes other than religious purposes after receiving the consent of the assessing officer.
Income Not Exempted from Taxation Under Section 11 of Income Tax Act 1961
There are specific scenarios where exemption cannot be claimed for income generated by trusts or institutions established for charitable or religious purposes. Exemptions under Section 11 of Income Tax Act shall not be available for income as stated below:
- When the whole income from the property held under a trust is used for religious purposes which do not benefit the public.
- The income of a charitable institution or trust which has been established for the indirect benefit of any specific caste or religious community.
- When the income of a charitable or religious trust is not invested as provided for under section 11 of Income Tax Act.
- When the entire income and the property of a religious, charitable trust are used solely for the benefit of specified persons.
- When the value of educational services or medical services provided by a religious trust or a charitable trust which runs an educational institution or hospital, or other medical institution is made available to specified persons.
- Any income which has been gained from the profits of a business unless the business is used to further the objects of the charitable or religious trust or institution. A separate book of accounts must also be maintained obtaining to such business.
Specified Persons Shall Include:
- Founder or author of the trust or institution.
- Persons making a contribution of an amount which is more than ₹50,000 in a financial year.
- If the founder or author or person making such a contribution is a Hindu undivided family, then all the members of such Hindu undivided family.
- A trustee or manager of the institution or the trust, regardless of the terminology of their designation.
- All relatives of the founder, author or persons who have made contributions as mentioned or a manager of a trustee as mentioned above.
- All institutions where any of the specified persons have a substantial interest, where the total contribution to such institution exceeds 50% of the donation made in a financial year.
Exemption If Property Held Under the Trust Is a Business Undertaking – Section 11 of Income Tax Act
Suppose a charitable institution or a trust claims an exemption for income which has been generated from the business undertaking from a property held under a trust. In that case, the assessing officer shall have the discretion to decide the amount which can be claimed as an exemption. Suppose the assessing officer finds out that the income determined is more than the income which has been disclosed in the book of accounts of the business undertaking. In that case, such excess amount shall not be liable to be claimed as an exemption and shall be treated as income which and shall be taxed accordingly.
Exemption on Income Generated from a Business
A trust or an institution cannot claim an exemption for income which has been generated from business unless such business Is used for the advancement of the charitable or religious purposes of the trust or institution.
To encourage the advancement of social welfare in India, the Central Government often provides many benefits, concessions, privileges, and exemptions to institutions established for charitable and not-for-profit purposes. Section 11 of Income Tax Act of 1961 grants tax exemptions to income received from a trust held for charitable or religious purposes. The term ‘charitable purpose’ has been defined in the Income Tax Act under Section 2(15) as “assistance to the poor and disadvantaged, education and preservation of monuments, preservation of the environment, preservation of places of historical and artistic interest, medical relief, yoga, promotion of sports and games, and advancement of any general public utility object”. Even though the term ‘religious purpose’ has not been defined under the Income Tax Act, ‘religious purpose’ shall include acts by a religious institution or a trust to benefit a specific caste or religious community and its tenets. Such income generated by a religious institution or a trust for religious purposes shall also be exempt from taxation.
Read Our Article: Application Of Income Conditional Precedent As To Section 11 Exemption