A ‘trust’ is defined as an obligation attached to the ownership of property, and arising out of the confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another ,or of another and the owner.

Tax exemption

Income of a charitable trust is exempt according the provisions of sections 11,12 and 13. The trust should be one established in accordance with law and its objects should fall within the definition of the term “charitable purpose”.

 ‘Charitable purpose’ is defined in . Sub-section 15 of Section 2 of the Income Tax Act. By virtue of this section, “charitable purpose” includes-

(a) Relief of the poor,

(b) Education,

(c) Medical relief, and

(d) Preservation of the environment and preservation of monuments or places or objects of artistic or historic       interest, and

(e) Advancement of any other object of general public utility.

The receipts from the clause (e) should not exceed 20% of the total receipt of the trust.

Income tax on Charitable Institution or Trust

We have discussed below income tax on various categories of income of charitable trust:

Category of income Income subject to tax Taxability
Donations/voluntary contributions Voluntary contributions with a specific direction to form part of corpus of trust or institution Exempt*
Voluntary contribution without such specific direction Forms part of income from property held under trust
Anonymous donations i.e., donations where donee does not maintain record of identity/any particulars of the donor Donation exceeding higher of:

i) 5% of total donations received by trust or

ii) Rs 1,00,000

Taxed at  30%
Anonymous donation received by trust established wholly for religious and charitable purpose on Taxable in the same manner  as voluntary contributions (without specific direction) as above
Income from property held under trust for charitable or religious purpose Income applied for charitable or religious purpose in India Exempt*
Income accumulated or set aside for the application towards charitable or religious purpose in India Exempt* to the extent of 15% of such income. This means at-least 85% of income from property to be applied for charitable and religious purpose in India as above and balance 15% can be accumulated or set aside. [See below comment on 85%]
Income from property held under trust created for charitable purpose which tends to promote international welfare in which India is interested CBDT either by general or special order has directed that such income shall not be included in the total income of trust Exempt*
Capital gain from asset held under trust in whole Net consideration is utilized fully for acquiring another capital asset Entire capital gain is deemed to have been applied for charitable and religious purpose and hence is exempt*
Net consideration is utilized partially for acquiring another capital asset Capital gain utilized in excess of cost of old asset transferred is considered to have been applied for charitable and religious purpose and is exempt*

*Only Charitable/ religious trust or institution registered under Section 12AA enjoys the exemption

 Exemption, not to apply in certain cases

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 direct of 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

**Specified person for this purpose are as below:

  • Author or founder of trust or institution
  • Any person who has made substantial contribution i.e., contribution of > Rs 50,000 upto the end of financial year
  • In case author, founder or person is HUF, a members of such HUF
  • Trustee/ manager of the trust / institution irrespective of their designation nomenclature;
  • Any relative of any of such author, founder, person who has made substantial contribution, trustee or manager as specified above
  • Any concern in which any of the above specified persons has substantial interest i.e., total contribution of > 50% upto the end of financial year

-Maitri Badani (Article Assistant)