Charity through Charitable Trust & Income Tax Provisions

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Charity through Charitable Trust & Income Tax Provisions

“Do your little bit of good where you are; it’s those little bits of good put together that overwhelm the world.” –Desmond Tutu

The world is full of beautiful people all around. There are numerous people & organization who are contributing generously during this period of Covid-2019. The contribution is by way of distribution of food, medicines, funds, pay without work, and much more. There are lots of people who are contributing to the noble cause in an unorganized way. Charity in an Organized way could be more powerful as it can cater to the vast class of poor, helpless & needy people. There are two kinds of trust which can be formed, Public trust & Private trust. A public charitable trust is one where the beneficiaries are general public at large. In a private trust, the beneficiaries are known & limited persons. A Public Charitable Trust can be formed by registering it with the office of the Charity Commissioner who has jurisdiction over the trust. Alternatively, it can be formed by registering under the societies Act under section 8 of the companies Act.

Income Tax Perspective & Precautions:

Income tax authorities are not really that charitable when it comes to charitable trusts. With instances of misuse of funds, Government is continuously tightening the law to bring more transparency in the working of charitable trusts. Some of the prominent provisions in the Income Tax Act – 1961 with regard to charitable trust are as under:

  1. After incorporation of trust, one must also do registration with the Commissioner of Income-tax (CIT) u/s 12AB (or 12AA) of the Income Tax Act-1961. Income of the trust will not be exempt from tax if it is not registered with the CIT. If trust wish to offer the benefit of income tax deduction u/s 80G to its donor, then it has to further get itself registered u/s 80G as well. For registration u/s 80G, separate application in Form 10G is required to be done. Without registration u/s 80G, donor will not be able to get the income tax benefit towards donation.
  2. Where the total income of the trust or institution, exceeds the basic exemption limit (i.e., Rs.2, 50,000/-)  in any previous year, the accounts of the trust is required to be audited by a qualified Chartered Accountant, and the audit report in Form No. 10B is required to be furnished electronically before filing the e-return of income. Also, income tax return is also required to be filed within due date. In case return is not filed by prescribed date then benefit of deduction towards application of fund as well as accumulation u/s 11(2) will not be available.
  3. The trust will not be eligible for deduction towards its expenditure if payment exceeding Rs. 10,000 is done in cash. Trust is also required to comply with the TDS provisions wherever applicable.
  4. If donor want to claim deduction u/s 80G then the donation of an amount exceeding Rs. 2,000/- has to be done by electronic mode only and not in cash.
  5. The trust must be a public charitable or public religious trust and not a private trust. The trust must be wholly for charitable or religious purposes.
  6. 85% or more of the income for the year must be used for charitable or religious purposes whereas balance up to 15% may be accumulated or set apart for future application to charitable or religious purposes. If 85% of the income is not applied to charitable or religious purposes during the year, the same must be accumulated or set apart for future application for definite and specified purposes. For this purpose, trust need to intimate in Form No. 10 to the Assessing Officer within the due date of filing of return of income & have to invest the money so accumulated or set apart only in specified modes. The maximum period for which such income can be accumulated or set apart is 5 years. The purposes for which income is sought to be accumulated or set apart for future accumulation must not be vague or non-specific, and cannot travel beyond the objects of the trust.
  7.  If income of the trust or institution includes any income from business, such business must be incidental to the objectives of the trust, and separate accounts must be maintained for such business.
  8. Anonymous donations, if any, will be taxable at the rate of 30%. Anonymous donation” has been defined as a voluntary contribution where the trust or institution receiving such contribution does not maintain record of identity indicating the name and address and other requisite particulars of the person making such contribution. The purpose is to ensure that unaccounted money does not flow into the charitable institutions in the form of anonymous donations. Religious trusts are outside the purview of taxation of anonymous donation.
  9. The Trusts is not eligible for income tax exemption in the following cases:
    A trust is formed for private religious purposes, which endure no public benefit.
    b) A charitable trust created or established on or after 1.4.1962 for the benefit of any particular religious community or caste (other than scheduled castes/tribes, back-ward classes or women and children).
    c) A trust or institution for charitable or religious purposes, if any part of its income or property is used or applied, or ensure, directly or indirectly for the benefit of a specified person.
  10. Under the Indian Income Taxation Laws, a trust is considered as charitable only if its objects are for the benefit of the society at large and not for an individual or group of individuals. More specifically, section 2(15) of the Income Tax Act, 1961, defines the expression “charitable purpose” as under:
    “Charitable purpose” includes relief of the poor, education, yoga, 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:
    Provided that 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 or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless,
    (i)  such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
    (ii)  the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;

 Of course, charity begins at home but should not end there. The carrying out the charity through trust will make reach wider and more meaningful.

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