There are 23 Chapters and 298 sections in the Income Tax Act, 1961. But only 2 sections talk everything about the taxation of Trusts, NGOs and other Non-Profit Entities. And these are 2 of the most complicated sections. Lets try to understand them.
Section 11 and Section 12 are the two sections that deal entirely about taxation of Trusts, or rather, the tax exemptions available to Trusts, while Section 12A talks about the conditions where Section 11 and 12 are applicable. So lets understand Section 12A first:
Section 12A: Conditions for applicability of Sections 11 and 12
As can be seen above, the trust should be registered u/s 12AA of the Income Tax Act, 1961 or should have at least applied for registration for the same. Along with that, the trust must get its accounts audited by a Chartered Accountant and File their Tax Return in a Timely manner which is by 30th September of each year or any extended date as may be applicable from year to year.
What if my Trust has not yet applied for 12AA Registration?
If a trust is not registered u/s 12AA, the exemptions of Section 11 and 12 are not available to the trust. The trust will be taxed as an Association of Persons (AOP) at the maximum marginal rate (MMR) under the Income Tax Act, i.e. at the rate of 30% + Surcharge + Cess. This means it is extremely important for a trust to obtain a 12AA registration as soon as the trust is formed.
Having understood the conditions of applicability of Section 11 and 12, let get to understand the main Sections themselves.
Section 11: Income from Property held for Charitable or Religion Purposes
All money received by a Trust can be categorized into Voluntary Contributions, Anonymous Donations, Capital Gains and Other Income Derived from Trust Property. All of these are income for the Trust.
However, section 11 provides the list of items which does not form part of total income, through which, upto 100% of the receipts can be excluded from income, enabling trusts to pay minimum or, in most cases, zero tax. Lets see how this can be done.
In order to be exempt, trust is required to apply at-least 85% of its income to charitable or religious purpose in India. As per the definition provided under tax provisions, charitable purpose includes the following:
Relief of the poor
Education
Yoga
Medical relief
Preservation of environment (monuments or places or objects of artistic or historic interest
Advancement of any other object of general public utility.
What if 85% of income is not applied?
If a trust or institution is unable to apply 85% of its income from property held under them, the income is still exempt if the following scenarios:
Scenario 1:
In case where such income is accrued during the year but not received during the year, or for any other reason not applied during the year, the same needs to be applied in the immediate next year or in the year when it is received. The income is deemed to have been applied for charitable purposes if the above condition is fulfilled and an application in Form 9A for the same is made to the Income Tax Officer
Scenario 2:
If a minimum of 85% of the income of trust or institution has not applied or deemed to have been applied as above, it is allowed to accumulate or set aside. And such income shall be exempt, if following conditions are satisfied.
Such trust or institution furnishes Form No. 10 – notice of accumulation of income by charitable trust or institution electronically on or before the due date for filing the return of income
Mention the purpose for which income is being accumulated or set aside
Income shall not be accumulated for more than 5 years
Money so accumulated or set aside is invested or deposited in specified mode.
What are Anonymous Donations and how are they taxed?
Anonymous donations are donations where trust does not maintain a record of the identity indicating the name and address of the person making such contribution.
Anonymous Donations are exempt upto Rs. 10 lakhs or 5% of the Total Contributions, whichever is higher.
Anonymous Donations in excess of the above is charged at the rate of 30% + Surcharge + Cess in accordance with Section 115BBC.
What is Capital Gains and how is it taxed for a Trust?
When a Capital Asset such as Building, Machinery, Furniture, being property held under trust, is transferred, the gain arising from such transfer is called as Capital Gains.
Where the entire consideration received on transfer is utilised to purchase a new asset, the entire capital gains is exempt. However, where only part of the consideration is utilised to purchase new asset, the difference between cost of new asset and cost of old asset, is exempt and the balance shall me taxable.
In case where no new asset is purchased, the entire Gain shall be taxable.
To read the bare provisions of the Income Tax Act, please visit
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