Section 11 of Income Tax Act: Exemption for Trusts

Subject to certain terms and conditions, Section 11 of the Income Tax Act of 1961 exempts income received from properties held by charitable trusts or organizations used for charitable or religious purposes.

What Is Section 11 of the Income Tax Act?

Section 11 of the Income Tax Act provides an exemption from tax for income derived from property held under charitable trusts and institutions. To claim this exemption, the income must come from properties that are used solely for religious or charitable purposes. Additionally, the entities must obtain a registration certificate under Section 12A or Section 12AA of the Income Tax Act. The books of accounts must be audited by a Chartered Accountant, and the audit report and income tax returns should be filed within the prescribed due date.

Conditions to Claim Exemption under Section 11

To qualify for the exemption under Section 11, the following conditions must be met:

1. Purpose: The income must be applied for religious or charitable purposes in India.
2. Registration: The entity must be registered under Section 12A or Section 12AA of the Income Tax Act.
3. Audit: The accounts of the trust or institution must be audited by a Chartered Accountant.
4. Filing: The audit report and income tax returns must be submitted within the prescribed due date.
5. Investment: The funds must be invested in specified modes under Section 11(5).
6. Non-benefit: The income should not directly or indirectly benefit the settlor or other prohibited persons defined under Section 13(3).

Additionally, income used by charitable institutions for promoting international welfare is also eligible for exemption under Section 11, subject to certain conditions:

• If the trust was formed before 1 April 1952, the income utilized for philanthropic or religious purposes outside India will be eligible.
• If the entity was created on or after 1 April 1952, income utilized for promoting worldwide welfare activities of which India is a part will be applicable for deductions.

The Income Tax Act of 1961 levies taxes on charitable institutions and trusts based on the nature of their income or revenue. The major provisions under which taxes are levied on the trust’s income, which includes capital gains, income from a house or property, and any other income, are Section 11 to 13 of the Income Tax Act of 1961. The following are the types of income that can be received by trusts:

• Voluntary Contribution
• Income from Property held under trust
• Capital Gains from trust property
• Anonymous Property

The incomes mentioned in Section 11 of the Income Tax Act, 1961 are considered exempted incomes, much like the incomes specified in Section 10. This means that these incomes are not included in the total income of the person, similar to agricultural income. However, there is one significant difference. To be eligible for exemption under Section 11, the income must be used for charitable or religious purposes.

Section 11 Exemption from Income Tax for Charitable or Religious Trusts?

To find out the exemption of income in the case of a Charitable or Religious Trust under Section 11, the following steps need to be followed:

• Step 1: Calculate the taxable income of the Trust or Institution.
• Step 2: Determine the general exemption: 15% of the “Income from property held for charitable or religious purposes” is exempt from tax under Section 11. This exemption can be accumulated for future use without any specific time-frame.
• Step 3: Calculate the exemption based on the application of income: The remaining 85% of the “Income from property held for charitable or religious purposes” is exempt in India, it is used for religious or charity causes.
• Step 4: Calculate the exemption based on accumulation: If 85% of the “Income from property held for charitable or religious purposes” is not applied for charitable purposes during the previous year, it can be accumulated or saved for a later use.

It is important to note that the exemption under Section 11 applies only if the income is used for charitable or religious purposes in India. Any income not applied for charitable purposes in the previous year can be accumulated or set apart for application in the future, subject to certain conditions.

Section 11(2) of Income Tax Act

Section 11(2) allows trusts and charitable institutions to accumulate income. They can retain up to 15% of their income if it is not used for charitable purposes in the year it is earned. This retained income can be kept as corpus capital for up to five years. Trusts must use any accumulated amount exceeding 15% within five years. This accumulated income will not be included in the institution’s overall revenue if they meet the following conditions:

1. Investment Modes: Trusts must invest the funds in modes specified in Section 11(5).
2. Notice to Assessing Officer: Trusts must send Form No. 10 to the assessing officer at least two months before the deadline for filing IT returns, notifying them of the income accumulation.
3. Court Order or Injunction: Trusts must explain the reasons for setting aside funds if a court order or injunction has mandated it.

Section 11(3) of the Income Tax Act

Section 11(3) protects charitable and religious trusts from paying taxes on revenue derived from their properties. This exemption helps trusts achieve their religious or philanthropic goals and use their income for societal benefits. However, if a trust violates the guidelines in Section 11(3), it may lose its tax-exempt status and have to pay tax on its revenue.

Section 11(4) of the Income Tax Act

Section 11(4) applies when charitable institutions use their properties for business activities. The Assessing Officer can evaluate the business’s income according to the Act’s rules. If the business income exceeds the amount reported in the accounts, the Officer will assume that the institution will use the excess for non-charitable purposes.

Section 11(5) of the Income Tax Act

Section 11(5) specifies the permissible investment options for trusts and charitable institutions to claim exemptions under Section 11. These options include:

1. Movable Property: Investments in movable property (excluding equipment and plants).
2. Government Savings Certificates: Investments specified in the Government Savings Certificates Act, 1959, and other securities or certificates issued by the Central Government under its Small Savings Schemes.
3. Public Company Shares: Shares of public companies, subject to specified requirements.
4. Cooperative Society Deposits: Deposits with cooperative societies that conduct banking, such as cooperative land development banks or cooperative land mortgage banks.
5. Post Office Savings: Funds in Post Office Savings accounts.
6. UTI Investments: Investments in Unit Trust of India (UTI).
7. Financial Corporation Securities: Securities issued by financial corporations engaged in long-term industrial financing in India, allowed as deductions under Section 36(1)(viii).
8. Urban Infrastructure Bonds: Bonds issued by publicly traded corporations in India that provide long-term financing for urban infrastructure.
9. Guaranteed Debentures: Debentures issued by firms with principal and interest amounts guaranteed by the Central Government.
10. Mutual Funds and Shares: Units of the National Skill Development Centre mutual funds and shares.
11. Indian Industrial Development Bank: Funds held in the Indian Industrial Development Bank.
12. Additional Options: Other investment options recommended by the Central Government.

Activities Exempt Under Section 11 of the Income Tax Act

Section 2(15) of the Income Tax Act of 1961 defines the phrase “charitable and religious purpose” to include, assistance to the poor and disadvantaged, education, 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 other general public utility object.

All the above-mentioned activities are eligible to be exempt under Section 11 of the Income Tax Class.

• Income derived by institutions involved in religious or charitable activities from their properties 
• Trusts may allocate up to 15% of their total revenue from such activities in the previous fiscal year 
• Charitable institutions or trusts should receive funds as voluntary contributions explicitly designated to become part of the trust’s or institution’s corpus 
• Trusts can reinvest capital gains from the sale of capital assets into new assets held exclusively for charitable or religious purposes, effectively considering the entire gain applied for such purposes.
• The income-producing property should be held in trust by a charitable/religious trust registration
• The property should only be used for charitable purposes.

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Judgments Relating to Section 11: Exemption for Trusts 

• Where an institution/trust strives to provide relief to the poor or to assist in any educational or medical cause, it will be deemed to have a charitable purpose even if it also engages in commercial activities.
• The activities of the Bureau of Indian Standards in terms of prescribing standards for goods/articles and implementing them through accreditation or continuous supervision, for example, cannot be considered trade, business, or commercial activity simply because testing procedures involve the payment of fees.
• The first provision to Section 2 would not apply to institutions established to provide placement services to ex-army personnel, their widows, and dependents, rather than to any trade, commerce, or business.

Exemptions Provided to Trusts Running Hospitals, Educational Institutions & Providing Financial Assistance 

• Income tax is not levied if an assessee operates a hospital for charitable purposes. For the same reason, a foundation that operates a hospital is exempt.
• Section 11 of the Income Tax Act of 1961 exempts any assessee establishment that provides financial assistance to schools, colleges, or other educational institutions.
• Section 11 of the Income Tax Act of 1961 exempts from income tax notice a society that operates a school or college.

Conditions for Availing Exemption under Section 11

Exemption under Section 11 of the Income Tax Act, 1961, is available to religious or charitable trusts and institutions. To qualify for this exemption, certain conditions must be met. These conditions are as follows:

1. Nature of Trust or Institution: The trust or institution seeking exemption under Section 11 must be established in India and must be of a religious or charitable nature. It should operate for the promotion of charitable activities, such as relief to the poor, education, medical relief, preservation of monuments, or advancement of any other object of general public utility.
2. Registration under Section 12A: The trust or institution must be registered under Section 12A of the Income Tax Act. This registration is necessary for the trust to be eligible for tax exemption on its income.
3. Genuineness of Activities: The activities of the trust or institution must be genuine and in line with its stated objectives. The Income Tax Department evaluates the genuineness and the actual implementation of the charitable activities carried out by the trust.
4. Income Application: The trust must apply a minimum of 85% of its income during the financial year for the purposes of the trust or institution. This means that at least 85% of the income generated by the trust should be used for charitable activities, and not more than 15% can be accumulated or invested for future use.
5. Maintaining Books of Accounts: The trust or institution must maintain proper books of accounts and other relevant documents related to its income and expenditure. These records should be available for scrutiny by the Income Tax Department.
6. Filing of Income Tax Return: The trust or institution must file its income tax return within the due date specified under the Income Tax Act.
7. Non-Applicability of Income for Benefit of Specific Persons: The income of the trust should not be applied or used for the benefit of any particular person or group of persons, other than those engaged in charitable activities.
8. Utilization of Donations: Any donations or contributions received by the trust should be utilized only for charitable purposes and not for any other purpose.

Section 60-63

Section 11 contains taxable clauses based on the provisions of Sections 60-63, which include:

1. Transfer of income without transfer of an asset.
2. Revocable transfer of assets.

The exemption provided under Section 11 is conditional and subject to meeting the requirements specified in Sections 12, 12A, 12AA, 13, and the aforementioned Sections 60-63. Additionally, any subsidy or grant provided by the Central Government for the corpus of a trust or institution established by the Central or State Government, respectively, shall not be considered as part of the income.

Judicial Decisions Relating to Section 11

1. Courts have interpreted ‘charitable purpose’ broadly to include relief of poverty, advancement of education, medical relief, and other purposes beneficial to society 
2. Judicial scrutiny often focuses on the efficient administration and management of trusts or institutions claiming tax exemptions under Section 11 
3. Decisions clarify rules regarding the application of income for charitable purposes versus accumulation, ensuring compliance with statutory provisions 
4. Courts examine the ownership and control of assets to determine if they are genuinely used for charitable activities, preventing misuse or diversion of funds 
5. Cases address the tax-exempt status of income derived from commercial activities by charitable institutions, balancing profit-making ventures with charitable objectives 
6. Rulings distinguish between activities benefiting the public versus those serving private interests, ensuring tax benefits align with genuine charitable endeavors 
7. Interpretations consider amendments to Section 11 and legislative intent, guiding how courts apply tax laws to charitable institutions over time.

Conclusion

The exemption outlined in Section 11 is also subject to the fulfillment of the conditions outlined in Sections 12, 12A, 12AA, 13, and 60-63, hence getting advice from ITR specialists such as the professional legal consultants at Vakilsearch is the way to go. Our experts can handle the ITR filing process for your charitable organization right from the get-go and seamlessly reduce your tax compliance burdens!

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