Section 11 Of Income Tax Act: Exemption For Charitable Trust Under Income Tax Act

Section 11 of the Income Tax Act contains provisions exempting the income derived from properties held under trust, not-for-profit or charitable organisations. This section is applicable to those trusts that work for charitable or religious purposes.

It is crucial to note that the income tax exemption for trust is available only to registered trusts that obtain a certificate from the Income Tax Department under section 12A or 12AA. The charitable organisation must also get its accounts audited by a chartered accountant, and its audit and income tax returns must be filed within the due date.

-Examples of Organisations Covered Under Section 11

To understand the provisions of section 11, one must know the organisations that fall under the category of charitable trusts. Here is a list of organisations that are classified as charitable organisations under section 12A or 12 AA of the Income Tax Act.

• Humanitarian hospitals. (run by individuals or charitable trusts)

• Institutions that provide financial aid to educational institutions, including schools, colleges, universities, etc.

• Societies that run schools and colleges to promote education.

To reap the benefits of donation to charitable trust income tax exemption, charitable organisations must meet specific conditions as mentioned by the Income Tax Act.

• The institution or trust must not be formed for the benefit of a specific community or religious caste.

• The charitable organisation must be registered under section 12AA of the Income Tax Act.

• The donations received by the charitable organisation must be used solely for the purpose mentioned in section 12 of the Income Tax Act.

• Trusts and charitable organisations must adhere to the provisions regarding the manner and mode of investing and depositing their funds as mentioned under sections 11(5) and 13(1) of the Act.

• The income received by the trusts must not benefit the settler (the person who creates the trust) either directly or indirectly.

• The charitable institution’s income or property should not be applied for the direct benefit of any person mentioned under section 13 (3), which includes the founder, manager, relative, trustee, author, etc.

-Donation to Charitable Trust Income Tax Exemption: International Welfare

• Some charitable organisations also use their income for international welfare. Though this income is exempt from tax, certain conditions must be fulfilled to avail the exemption benefits.

• Trusts formed before 1st April 1952 can claim an exemption of income used for philanthropic or religious activities outside India.

• Trusts formed after 1st April 1952 are eligible for exemption of the income if it is utilised for promoting worldwide welfare activities in which India participates.

-Under section 11 of the Income Tax, the following are the incomes for which a charitable trust can claim exemption:

• The income received from the property held by the charitable organisation for religious or charitable purposes.

• The income that the charitable trust receives as voluntary donations with specific instructions to make it a part of the corpus or capital of the institution.

• Up to 15% of the total income of the trust, which it earned in the previous year from its activities.

• Capital gains earned by the trust are also exempt to the extent the net consideration is either deposited or invested in the specified modes within the time limit.

Section 11 (1) (a) of Income Tax Act

• Section 11 (1) (a) of the Income Tax Act lays down the provisions that deal with the transfer of capital assets held by trusts and used for religious or charitable purposes, either wholly or partially. For taxation, section 11 (1) (a) considered capital gain earned by charitable trusts as a part of their income.

• Thus, charitable trusts were required to utilise the capital gains from assets for charitable purposes. This requirement of utilising the capital gains resulted in the depletion of the corpus of trusts. Thus, it was necessary to introduce provisions that allowed the charitable organisations to re-invest the net consideration in new capital assets, which would help to maintain the corpus.

• Subclause 1A was added to section 11, which allowed the charitable trust to re-invest the net consideration in new capital assets, which would result in the corpus remaining intact in the long run. Subclause 1A was inserted into section 11 retrospectively on 1.04.1961. The clause brings relief for the charitable trusts as it states that the income will be deemed to be utilised for the purpose of section 11 (1a) if the trust re-invests in another capital asset.

Provisions Related to Capital Gains for Charitable Trusts

-There can be two situations in the case of charitable trusts:

• The capital asset is held by the trust wholly for charitable purposes.

• The capital asset held by the trust is only partially for charitable purposes.

-Further, the situations can be divided into two scenarios, which are as follows:

-Situation 1: Where the entire net consideration is utilised for charitable purposes.

-Situation 2: Where only a part of the net consideration is utilised for charitable purposes.

Let us consider an example to understand the quantum of capital gains deemed to have been applied under each situation.
Example 1:**

The extent of capital gains deemed to have been applied for the purpose of section 11 (1) (a ) is as follows:**

As per section 11 (2) of the Income Tax Act, a trust or charitable institution can accumulate up to 15% of its total income. Thus, it implies that a trust can keep this income (15% of the total) idle without utilising it for any charitable activities in the same year.

The provision further states that the charitable organisation is not required to use this income for its activities for the next 5 years and can retain the amount as its capital or corpus for an indefinite period. However, any income above 15% must be utilised by the trusts in the next five years. It implies that any income in excess of 15% cannot be held by the trust indefinitely.

However, under a few circumstances, the income in excess of 15% will not be considered a part of the trust’s total revenue.

• When the income is utilised in the modes mentioned in section 11(5).

• If some income has been kept aside in adherence to a court order or injunction, the charitable organisation must state the reason.

• If the trust sends form no. 10, at least two months prior to the date of filing the return, informing the income tax officer of the accumulation of funds by the institution.

The provisions of section 11 (4) come into effect when a charitable trust holds any business as its property. When the trust claims that the income derived from the business is not a part of its total income, the assessing officer will have the authority to assess the income as per the provisions of the Act and decide whether the trust’s income exceeds the income declared in its accounts.

Besides, the assessing officer will also deem that the excess income is used by the trust for purposes other than charitable or religious activities.

Trust and charitable institutions who want to avail of the exemption of income are required to invest their revenue in the following modes:

• Investments made in immovable properties, excluding plants and equipment.

• Deposit or investment in securities and certificates issued by the Central Government, such as savings certificates.

• Investing in the shares of public sector company

• Deposits made in Post Office Savings Bank Accounts

• Deposits or investments in securities issued by a financial corporation that is engaged in offering long-term finance to support industrial advancement in India and is eligible for deduction under section 36 (1)(viii).

• Investing in units of mutual funds and purchasing the shares of the National Skill Development Centre, etc.

• Investing in the units of Unit Trust of India

• Making a deposit or investment in bonds issued by a public company formed and registered in India, which is primarily engaged in providing long-term financing for India’s urban infrastructure.

• Investments in debentures issued by companies for whom the government guarantees the principal and interest amount.

• Funds deposited with the Indian Industrial Development Bank.

• Any deposits made with a cooperative society conducting banking. It includes cooperative land mortgage banks or cooperative land development banks.

• Any other investments, as specified by the Central Government.

The provisions of section 11 donation to charitable trust income tax exemption mention voluntary donation, which also qualifies for exemption. A charitable trust may receive two types of donations, which are as follows:

Donation for Corpus Fund: Charitable trusts receive corpus fund donations from the public, which must become a part of the organisation’s capital fund. These types of donations fall outside the purview of section 11 (1) (d). Therefore, even if the trust does not use the fund, it is exempt from taxation.

-Note: Voluntary donations to corpus funds are exempt only in the case of charitable trusts registered under section 12A or 12 AA.

-Other Donations: If a charitable institution receives voluntary donations which do not come with an intention to form a part of the corpus, then such income will be added to the taxable income of the trust.

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Section 11 aims to reduce the tax burden of charitable and not-for-profit organisations that are engaged in charitable and religious activities by providing exemption for charitable trust under the Income Tax Act. However, this exemption benefit is only available to those charitable organisations that are registered and fulfil the conditions specified in the Act.

Moreover, section 11(5) also specifies the modes of investment that can assist the trust in making appropriate investments to claim the income exemption. These provisions aid charitable organisations in carrying out their charitable and social activities smoothly while also maintaining sufficient capital.