Charitable trusts in India play a vital role in social welfare. To ensure transparency and accountability, the Income Tax Act provides specific exemptions and compliance requirements for them. Here’s a concise overview of how charitable trusts are taxed:

What is a Charitable Trust?

A charitable trust is an arrangement where assets are set aside to benefit the public. These can be:

Public trusts (for public welfare) – Charitable or religious.

Private trusts (for individuals or families).

Though not defined in the Income-tax Act, trusts are governed by legal precedents and must follow specific tax rules to get exemptions.

Key Exemptions – Section 11 & 12

Trusts can claim exemption on income:

If 85% of income is applied to charitable or religious purposes.

Remaining 15% can be accumulated.

Exemptions require 12A/12AB registration with the Income Tax Department.

Business income is exempt only if it’s incidental to charitable objectives and accounts are maintained separately.

Conditions to Qualify for Tax Exemption

The trust should be for public benefit, not for any religious community or caste.

Must maintain audited accounts if income exceeds ₹2.5 lakhs.

Funds must be invested in modes prescribed under Section 11(5).

Anonymous or misapplied donations may attract tax.

Recent Changes & Compliance

If trust modifies its objectives, fresh registration under 12A is mandatory within 30 days.

Form 10 & 9A must be filed timely for accumulation of income.

Delay in filing may lead to loss of exemption or tax at maximum marginal rate.

Filing Returns & Audit

Return must be filed in Form ITR-7.

Audit is compulsory if gross income (before exemption) exceeds ₹2.5 lakhs.

Non-compliance attracts penalty and loss of exemptions under Section 11(2).

Section 80G – Donor Deduction

Trusts registered under Section 80G can offer tax deductions to donors. Conditions include:

Proper registration

No benefit to a religious community or caste

Regular accounts maintained

Loss of Exemption

Exemptions are withdrawn if:

Income is used for personal benefit of trustees.

Funds are invested in prohibited modes.

Trust converts into a non-charitable entity (Section 115TD imposes exit tax).

Conclusion:

Charitable trusts must strictly follow registration, investment, and filing norms to retain tax benefits. Proper compliance not only ensures exemption under Sections 11 & 12 but also builds public trust and credibility.