Understanding Compliances and Income Tax Filing of Charitable Trusts

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The Income Tax Act, 1961 provides certain tax benefits to a trust that is set up for religious or charitable purposes. To guarantee compliance and maximise benefits, trustees must be knowledgeable of the subtleties of taxability and filing procedures.

Charitable and religious trusts are provided substantial relief under Section 11 of the Income Tax Act, exempting them from paying taxes on income derived from their properties. This exemption facilitates trusts to fulfil their religious or charitable objectives and utilise their income for the benefit of the society. However, these benefits are only available to particular types of income, and institutions must satisfy certain conditions to claim them as well.

Eligibility for Income Tax Exemption

A charitable trust is required to meet certain requirements in order to be eligible for income tax exemption:

  1. Registration: In accordance with Section 12A of the Income Tax Act, the trust must be registered with the Commissioner of Income Tax.
  1. Legal Obligation: A trust deed or other such legal instrument ought to govern its assets.
  1. Objective: The objective of trust must be charitable or religious, with no advantages going to certain castes or religious communities.
  1. Non-Benefit to Settlor: Neither the settlor nor their relatives shall profit from trust income.
  1. Utilisation of income: Only income utilised for religious or charitable purposes is exempt.
  1. Audit Requirement: An accounting audit is required if income exceeds the basic exemption.

The Supreme Court, in the case of Ahmedabad Urban Development Authority, vehemently stated that the institutions claiming the charitable exemption cannot be engaged in trade, commerce, or business activities used for general public utility purposes.

Read More: Advancement of GPU cannot be interpreted as ‘Charitable Purposes’ If Done as Business, No Income Tax Exemption: Supreme Court

Taxability of Charitable Trusts

Income of the trust will be taxed similar to that of an Association of Persons ( AOP ) if it is not exempt from tax. Taxes are not levied on income up to Rs. 2.5 lakh. But only income that is not governed by the Act for charitable trusts are subject to the AOP tax rates.

Income may be subject to Maximum Marginal Rate ( MMR ) taxation and exemption forfeiture for violating pre-requisites for registration.

The following slab-rate applies while taxing the income:

Income Tax

  • There is no tax due on amounts up to Rs. 2.5 lakh.
  • 5% of (taxable income less Rs. 2.5 lakh) is what goes from Rs. 2.5 lakh to Rs. 5 lakh.
  • Rs. 12,500 + 20% of (taxable income less Rs. 5 lakh) for Rs. 5 lakh to Rs. 10 lakh
  •  Rs.112500 plus 30% of taxable income less for above Rs. 10 lakh

Surcharge

  • 10% (taxable income above Rs. 50 lakhs)
  • 15% (taxable income above Rs. 1 crore)
  •  25% (taxable income above Rupees 2 crore)
  •  37% (taxable income is above 5 crore)

Cess

  •  4% of the tax plus surcharge

Filing of Income Tax Return

 If a trust has gross total income over the basic exemption limit, they need to file income tax returns on form ITR-5. Some trusts have to file the income tax return regardless of their total revenue. Every year, the annual return of income (ITR-7 Form) shall be filed. Form 10B must be provided by a charitable or religious trust or organisation that has submitted an application for registration by filing Form 10A, or that has been registered under Section 12A of the Income Tax Act.

Form ITR-7

Firms, Companies, Local Authorities, Association of Persons (AOP), and Artificial Judicial Persons that claim exemption under any of the following categories may file an Income Tax Return through Form ITR-7:

  • If they receive income from a charitable or religious trust – under Section 139 (4A)
  • If they receive income from a political party – under Section 139 (4B)
  • If they get compensation from scientific research institutions – under Section 139 (4C).
  • If they receive their income from khadi and village industries, colleges, universities, or other institutions – under Section 139 (4D).

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