Can a Charitable Trust File Form 121 If Income Is Below ₹3 Lakh? A Grey Area in TDS Law That Needs Clarity
The Income Tax law is often praised for simplification, but at times, simplification brings with it a fresh layer of complexity. One such emerging issue under the new tax regime for Tax Year 2026-27 revolves around the use of Form 121 by charitable trusts. The question is simple, yet surprisingly controversial: Can a charitable trust with income below the basic exemption limit file Form 121 to avoid TDS?
With the introduction of Section 393 of Income Tax Act, 2025, Form 121 has replaced the earlier Forms 15G and 15H. The intent is clear-if the taxpayer’s estimated total income results in nil tax liability, then TDS should not be deducted. However, the law does not clearly spell out whether charitable trusts fall within the scope of such self-declaration.
Traditionally, charitable trusts registered under Section 12AB of Income-tax Act operate under a special exemption framework governed by Sections 11 to 13. Their income is not inherently tax-free. Instead, it becomes exempt only if certain conditions are satisfied, such as application of 85% of income for charitable purposes, compliance with accumulation rules, and absence of violations. Because of this conditional nature, the department generally prefers verification through a Lower Deduction Certificate under Section 197 of Income-tax Act, 1961 rather than allowing self-declaration.
However, the real controversy arises in cases where the income of the trust is below the basic exemption limit, say ₹2 lakh or ₹2.5 lakh. In such a scenario, even if the trust does not apply any income towards charitable purposes, the tax liability would still be nil purely due to slab exemption. This leads to a very important question-if tax is nil without invoking Sections 11 and 12, then why should the trust not be allowed to file Form 121?
From a computational perspective, the argument in favour of allowing Form 121 is quite strong. The trust’s income is below the taxable threshold, no special rate income is involved, and tax liability is determinable upfront. In fact, in such cases, the trust’s position may be even stronger than that of an individual who claims deductions or rebate to arrive at nil tax liability.
On the other hand, the counter-view continues to dominate practical implementation. The reasoning is that a charitable trust is not a regular assessee like an individual. It exists within a distinct legal framework where taxability is often linked to compliance conditions. Even if income is low in a particular year, the entity itself is governed by special provisions, and allowing self-declaration may create compliance risks for the deductor.
This divergence between legal interpretation and practical approach creates a classic grey area. On one side, there is a logical argument supporting eligibility for Form 121 where income is below the exemption limit. On the other, there is institutional reluctance driven by risk management and absence of explicit clarity in law.
In practice, most banks and deductors are likely to insist on obtaining a Lower Deduction Certificate under Section 197, even in such low-income cases. This shifts the responsibility of verification to the Assessing Officer and avoids potential disputes.
However, this approach increases compliance burden and defeats the very purpose of introducing a simplified declaration mechanism like Form 121.
This issue is gaining relevance with the expansion of TDS provisions and increasing number of small charitable trusts earning interest income. What was once a niche issue is now becoming a common compliance challenge.
Perhaps the time has come for the legislature or CBDT to step in and provide clarity.
Either charitable trusts with income below the basic exemption limit should be explicitly allowed to file Form 121, or a clear exclusion should be provided to avoid interpretational disputes.
Until such clarity emerges, professionals and taxpayers are left navigating between legal logic and practical caution.
The debate ultimately boils down to a simple but powerful question: If a charitable trust has no tax liability without relying on exemption provisions, should it still be denied the right to self-declare?
That question remains unanswered-and that is precisely what makes this one of the most engaging and relevant tax debates of the current year.
