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Income Tax India

Income Tax on Charitable Trusts

Charity is an inevitable part of the rich traditions and religious beliefs in India. No matter how much people run behind money and chase worldly treasures, some void always remains in their emotional space. It’s often said, the more the savings, the more the worries. sharing and caring for the human brotherhood has always been a priority emotion, rather a psychological need. The Indian society is known for its integrity and societal bonds. This has always been a land of philanthropists irrespective of the society’s income disparities. This gave birth to the idea of charitable institutions to give a structural and legal framework to these humanitarian activities carried out by the various sectors of the economy. The introduction of such structured organisations not only radically reduced the probability of exploitations but also aided in the encouragement of such activities through tax exemptions and deductions.

According to BAIN study report 2010, people in our country donate between 1.5 to 3 per cent of their household income annually. this shows the importance of understanding the structures and legalities of charitable institutions in India.

CHARITABLE INSTITUTIONS
A public charitable institution can be in the form of:

1. Trusts
2. Society
3. Section 8 company- Company formed for charitable purposes

Taxability of trusts

The income of charitable trusts are exempt u/s 11 of the IT Act if they meet the following criteria;

a. The trust should be registered u/s 12AA of the Act.
b. if the gross receipts of the trust exceed the basic taxation limit of ₹2,50,000, the accounts should be audited u/s 139(4A)

c. 85% of the income of the trust should be applied (spent) for approved purposes. The unapplied amounts shall be set aside for charitable purposes.

Such accumulation shall satisfy the following conditions;

  1. Period of accumulation shall not exceed 5 years
  2. The amount should be invested in a scheduled bank, Co-operative Bank or a Post Office Savings Bank
    Central and State Government Savings Certificate and Securities
  3. Units of UTI, Shares, Debentures and Bonds specified in Section 11(5)
  4. Immovable Property

It should also be noted that the aggregate receipt from a trade, commerce or business activity shall not exceed 20% of the total receipt of the trust.

Registration u/s 80G

Registration u/s 80G helps the persons donating money to the charitable trusts to get deductions from their income at least to the extent of 50% of such donations. (subject to conditions).

This deduction is not available for donations to religious trusts.

Corpus Donation – Not an Income?

Specific purpose donations which are credited to such specific funds and are prohibited from being used for other purposes. Eg: Building fund donations received can only be used for expenses related to buildings. Tax liability does not arise on such receipts.

Income TAXABILITY
Anonymous Donation(section 115BBC) Taxable at 30.9% (including cess) after deducting 5% of total donations received or 100,000 whichever is higher
Long Term Capital Gain Taxable at 20% (excluding cess)
All other income May or may not be exempted incomes

CASES WHERE ANONYMOUS DONATIONS ARE NOT TAXABLE U/S 115BBC

  • Donations received by pure religious trusts. Eg:-Donations by devotees to a temple trust.
    Exception: In case such religious/charitable trust also runs a school/medical institution/ educational institution, and the donations are received with a specific direction that those amounts are for such institutions, then such donations shall be taxable.
    The calculation of tax liability under the above circumstances: (Tax rates for AY 2018-19 are taken)

    Situation Total Donation Amount Spent Undisclosed
    1 10000000 9000000 2500000
    2 10000000 6000000 2500000
  • Situation I
    Particulars Amount
     ANONYMOUS DONATION
     Income 25,00,000.00
     Less: Basic exemption limit u/s 115BBC -5,00,000.00
     (5% of total donations received or 100,000 whichever is higher)
     TAXABLE INCOME 20,00,000.00
     TAX LIABILITY (A)
     Tax at 30.9%(including cess) 6,18,000.00
     OTHER INCOME
     Income other than anonymous donation(already taxed) 80,00,000.00
     Less: 15% exempt -12,00,000.00
     NET INCOME 68,00,000.00
     Less: Actual amount spend (restricted to net income) 68,00,000.00
     TAXABLE INCOME                                  –
     TAX LIABILITY (B)  NIL
     TOTAL TAX LIABILITY (A+B) 6,18,000.00

    Situation II

    Particulars Amount
     ANONYMOUS DONATION
     Income 25,00,000.00
     Less: Basic exemption limit u/s 115BBC -5,00,000.00
     (5% of total donations received or 100,000 whichever is higher)
     TAXABLE INCOME 20,00,000.00
     TAX LIABILITY (A)
     Tax at 30.9%(including cess) 6,18,000.00
     OTHER INCOME
     Income other than anonymous donation(already taxed) 80,00,000.00
     Less: 15% exempt -12,00,000.00
     NET INCOME 68,00,000.00
     Less: Actual amount spend (restricted to net income) 60,00,000.00
     TAXABLE INCOME 8,00,000.00
     TAX LIABILITY (B)
     0-250000 0%
     250000-500000 5% 12,500.00
     500000-800000 20% 60,000.00 72,500.00
     TOTAL TAX LIABILITY (A+B) 6,90,500.00
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