Indian culture and religious beliefs attach great importance to charity. In India, non-governmental organisations (NGOs) can be registered as trusts/ societies or a Section 25 company. Here’s a look at the provisions in Income-Tax Act relating to charitable trusts/ institutions.

Charitable purpose: This term includes relief of the poor, education, medical relief, preservation of environment, preservation of monuments, places, and objects of artistic or historic interest, and advancement of any other object of general public utility among others. However, an object of general public utility is not considered a charitable purpose if it involves any trade/ commerce generating aggregate receipts exceeding Rs 25 lakh.

Registration: Income from property held under trusts is exempt only if the trust makes an application to the Commissioner of Income-tax within one year of creating the trust. In such cases, registration is granted from the date of creation. ITA also provides for registration in cases where the application has been delayed, subject to certain conditions. The Commissioner passes the order within six months from the end of month in which the application is made. Trusts are also required to be registered to make donors eligible for deduction.

Exemption is confined to the portion of the trust’s income derived from “property held under trust”, which is applied to charitable or religious purpose in India or is accumulated for such purpose, subject to certain conditions.

Corpus donation: Income in the form of voluntary contribution specifying it shall form part of the corpus is not included in the total income of the trust.

Deduction for donation: Donor of trust/ institution is entitled to benefit of deduction from his income for a qualifying percentage depending on the type of donation.

Anonymous donations are taxed at a flat rate of 30 per cent on the aggregate amount received in excess of 5 per cent of total donations received by assessee; or Rs one lakh.

Business: Income from business is treated as income derived from “property held under trust” if it is incidental to the attainment of the trust’s objective, and separate books of account are maintained.

Capital gains: ITA provides exemption of capital gains derived from capital asset held under trust. The quantum of exemption depends on the net consideration utilised to acquire a new capital asset.

Investment modes: ITA provides for modes of investment of income accumulated or set apart, including deposit in any account with a scheduled bank, post-office deposit, units of UTI and so on.

Withdrawal/ non-availability of exemption: ITA provides for withdrawal/ non-availability of exemption in cases where income is applied for purposes other than the object of the trust, where any part of the income enures directly or indirectly for the benefit of a person having an interest in the activities of the trust and so on.

Audit: The ITA provides for audit by a chartered accountant where the income of the trust computed without giving effect to exemption provisions exceeds the basic exemption limit (Rs 2 lakh for 2012-13).

Direct Tax Code: In the DTC, the term ‘charitable purpose’ has been altered to ‘permitted welfare activity’. The charitable trusts would be liable for tax at 15 per cent of their surplus as calculated in a prescribed manner and according to the cash system of accounting.

There is no provision for accumulation of income by the trusts under the new code.

Rajesh Patil is a Senior Manager with Deloitte Haskins & Sells

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