Section 11 of Income Tax Act 1961: 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.

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.

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.

• The trust must be established in order to fulfill a legal purpose.
• The income received should be utilized for charity or religious purposes in India and must be obtained from property held under a trust wholly or in part (for assets held in part, the exemption can be claimed only if the trust was established prior to the beginning of this act). 
• The income received should be utilized or set aside for charitable purposes to be performed specifically in India.
• The amount set aside should not exceed 15% of the total amount of income received in the preceding year. In other words, a minimum of 85% of the trust property’s income should be used for philanthropic purposes in India.
• The income-producing property should be held in trust by a charitable/religious trust registration
• The property should only be used for charitable purposes.
• The trust must register with the Commissioner of Income Tax within the time frame specified.
• The charitable trust should not be established to benefit a specific religious community or caste.
• No part of the income from such charitable trusts or institutions should benefit the settler or other specified persons, either directly or indirectly.
• The trust funds must be invested or deposited in the forms and modes specified in Section 11(5).
  In Section 11(1)(a) the term ‘wholly’ here refers to the object itself, not the property held in trust. The trust should be entirely for charitable or religious purposes, but the property does not have to be entirely owned by the trust.

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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. If an institution or trust engages in providing relief to the poor or supporting educational or medical causes, it will be considered a charitable purpose, even if it incidentally involves commercial activities.
2. Imparting yoga training through well-structured yoga camps falls within the category of education, which is already covered under Section 2(15).
3. The object of the trust must be focused on profit-making for trade, commerce, or business to be considered under general public utility. Services rendered without a profit motive will not be associated with trade, business, or commerce.
4. The activities of the Bureau of Indian Standards, involving the prescribing and implementation of goods/articles standards, should not be considered trade, business, or commercial activities solely because testing procedures involve charging fees.
5. Institutions established to provide placement services to ex-army personnel, widows, and dependents will not be affected by the first proviso to Section 2(15) as long as they are not engaged in trade, commerce, or business.
6. Cattle breeding and measures to improve the quality of cows and oxen are not profit-making activities, making them eligible for exemption, considering India’s agricultural nature.
7. Government authorities established to provide housing, community facilities, civic amenities, and other infrastructural facilities will be granted exemption for these charitable activities.
8. If the primary objective of organizing seminars, conferences, or auto expos is to promote the growth of the automobile industry in India, such activities will not fall under the proviso to Section 2(15), even if they generate substantial income.
9. Cancellation of trust registration can only occur due to a modification in the nature of the activity and not solely because of excess turnover from commercial activities.
10. The income should be derived from property held under trust by the charitable or religious trust institution.
11. The trust must register under the Commissioner of Income-tax within the specified time limit.
12. The creation of a charitable trust should not be biased in favor of a particular religious community or caste.
13. No part of the income from the charitable trust or institution should directly or indirectly benefit the settlor or specified individuals.
14. The property should be entirely held for charitable purposes.
15. The funds of the trust must be invested or deposited in permissible forms and modes as prescribed in Section 11(5).
16. Promotion of sports and games qualifies as a charitable purpose and is exempted under Section 2(15).
17. Microfinance facilities provided to the poor and needy will be eligible for exemption.
18. Services performed by the Institute of Chartered Accountants of India in organizing seminars, conferences, and workshops for educating people on commercial and tax laws fall under the object of general public utility.

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!

Read More:

• How to File an ITR in India?
• How to Prepare Income Tax Return?
• What Is ITR Filing in India?