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.
Overview
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.
What to look for 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) addresses the accumulation of income by charitable institutions and trusts. These entities can retain up to 15% of their income without having to spend it on charitable activities in the year it was earned. They are not required to use this retained amount for charitable purposes in subsequent years and can keep it as part of their capital corpus for up to five years. However, any income accumulated beyond 15% must be used within the next five years. This additional accumulation will not be included in the institution’s total income if:
- The funds are invested in the modes specified under Section 11(5)
- Form No. 10 is submitted, notifying the assessing officer of the income accumulation by the charitable trust at least two months before the due date for filing income tax returns
- The institution specifies the purpose for which the funds are set aside
- The income is set aside due to a court injunction or order.
Section 11(4) Of Income Tax Act
Section 11(4) applies when charitable institutions own business undertakings. It stipulates that if the institution claims that the business’s income should not be included in the trust’s total income, the Assessing Officer (AO) has the authority to assess the business’s income according to the Act’s provisions. The officer will determine whether the business’s income exceeds the amount reported in its accounts. Furthermore, the officer will assume that any excess income will be used for purposes other than religious or charitable activities.
Section 11(5) Of Income Tax Act
Section 11(5) of the IT Act outlines the approved modes of investment for charitable institutions:
- Investment in immovable property (excluding machinery and plants)
- Investment in government savings certificates as defined in clause (c) of Section 2 of the Government Savings Certificates Act, 1959, and other securities or certificates issued by the Central Government under its Small Savings Schemes
- Savings certificates and other securities or certificates issued by the Central Government
- Shares of public sector companies, subject to specified conditions
- Deposits with scheduled banks or cooperative societies engaged in banking, including cooperative land mortgage banks or cooperative land development banks.
- Deposits in Post Office Savings Bank Accounts
- Investments in units of the Unit Trust of India (UTI)
- Securities issued by financial corporations involved in long-term industrial financing in India, eligible for deductions under Section 36(1)(viii)
- Deposits or investments in bonds issued by public companies in India primarily engaged in providing long-term finance for urban infrastructure
- Debentures issued by companies with the Central Government guaranteeing the principal and interest
- Shares and mutual fund units of the National Skill Development Centre
- Deposits with the Industrial Development Bank of India (IDBI)
- Other investment modes specified 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.
| If the trust was founded before January 1, 1962, the exemption will be available, even if it is partially for religious or charitable purposes; however, the same condition of 85 percent application applies. |
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.
Section 11 contains taxable clauses that are subject to the provisions of Sections 60-63, which are as follows:
Furthermore, any subsidy or grant made by the Central Government to a trust or institution established by the Central Government or a State Government, as the case may be, shall not be considered income. |
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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:
- Transfer of income without transfer of an asset.
- 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
- Courts have interpreted ‘charitable purpose’ broadly to include relief of poverty, advancement of education, medical relief, and other purposes beneficial to society
- Judicial scrutiny often focuses on the efficient administration and management of trusts or institutions claiming tax exemptions under Section 11
- Decisions clarify rules regarding the application of income for charitable purposes versus accumulation, ensuring compliance with statutory provisions
- Courts examine the ownership and control of assets to determine if they are genuinely used for charitable activities, preventing misuse or diversion of funds
- Cases address the tax-exempt status of income derived from commercial activities by charitable institutions, balancing profit-making ventures with charitable objectives
- Rulings distinguish between activities benefiting the public versus those serving private interests, ensuring tax benefits align with genuine charitable endeavors
- 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!
Frequently Asked Questions
What is Section 11 of the Income Tax Act?
Section 11 of the Income Tax Act, 1961, provides exemptions on income earned by charitable or religious trusts/institutions if such income is applied towards charitable or religious purposes within India. The section outlines conditions under which such entities qualify for tax benefits, ensuring funds are utilised for societal benefit.
What is section 12AA of the Income Tax Act?
Section 12AA grants registration to charitable or religious trusts/institutions for claiming tax exemptions under Section 11. It mandates entities to apply for registration with the Income Tax Department to avail themselves of tax benefits. The section governs the process and conditions for obtaining and maintaining tax-exempt status.
Is depreciation allowed under Section 11?
Yes, you may use this section to deduct any and all expenses, including depreciation. However, depreciation is prohibited by this clause if the acquisition of an asset was recognised as an application of income in the prior year.
What is the exemption limit for trust?
There is no specific exemption limit applicable universally to all trusts under the Income Tax Act. The tax-exempt status under Section 11 depends on the fulfillment of conditions related to the application of income for charitable or religious purposes by the trust or institution.
What is section 12A and 12AA of the Income Tax Act?
Under the Income Tax Act of 1961, charitable or religious trusts and institutions must register, and Section 12AA of that act relates to the Commissioner of Income Tax's (CIT) approval of those organizations.
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