Charitable trusts and institutions enjoy tax exemption under certain conditions. However, recent Finance Acts have introduced significant amendments to ensure better compliance and accountability. Here’s a brief overview of the key changes you need to know:

📌 Corpus Donations – Section 11(1)(d) (Effective 01.04.2022)
Voluntary contributions directed towards the corpus are tax-exempt only if:

They are invested or deposited in the specified modes under Section 11(5),

And such an investment is maintained specifically for the corpus.

📌 Application of Income – Explanations 4 & 5 to Section 11(1)
Introduced by the Finance Act, 2021 (effective from 01.04.2022):

Corpus & Loans: Application of income from corpus funds or borrowings is not treated as “application” unless it is restored back from the income of a future year.

Excess Application: Any excess application of earlier years cannot be carried forward or set off.

📌 Actual Payment is Key (Clarification from 01.04.2021)
Only actual spending/payment counts as “application” of income.

Mere accrual or booking of liability doesn’t qualify.

Once claimed as an application, the same amount can’t be reclaimed in later years.

📌 Lapse of Accumulated Income – Section 11(3)(c) (Effective 01.04.2023)
Income accumulated under Section 11(2) becomes taxable in the fifth year if not utilised as intended.

📌 Cancellation of Registration – Section 12AB(1)(4)
PCIT/CIT can cancel registration if:

There are “specified violations”, such as:

Misuse of income for non-charitable or private religious purposes.

Business income not incidental to objectives or without separate books.

Based on AO’s reference or risk-based selection.

⏳ The order must be passed within 6 months from the end of the quarter in which notice was first issued.

📌 Tax Treatment on Loss of Exemption (Sub-sections 10 & 11 – w.e.f. 01.04.2023)
If exemption is denied:

Income is computed after allowing expenditure (except capital) incurred in India for its objects, provided:

It’s not from the corpus or loans/borrowings.

Final Thoughts

These changes aim to plug loopholes and ensure that tax-exempt funds are used strictly for charitable purposes. Trusts and institutions must adhere strictly to new rules on investments, applications, and reporting to retain exemption status.