By CA Pranay Goyal | Reviewed and Summarised for Public Awareness

Charitable institutions in India operate in a regulatory environment designed to foster genuine public welfare while ensuring transparency and compliance. Understanding taxation and registration requirements is vital for any organisation seeking income tax exemptions under the Income Tax Act, 1961.

What Is a Charitable Trust?

A trust is a legal arrangement where the settlor transfers property to trustees for the benefit of beneficiaries. Trusts can be:

• Public Trusts: For the benefit of the general public.
• Private Trusts: For individuals or families.

Only public charitable or religious trusts are eligible for tax exemptions under Sections 11 and 12 of the Income Tax Act.

Section 12A & 80G: The Foundation of Exemption

To claim tax exemption, charitable organisations must register under:

• Section 12A/12AA/12AB: Recognises the trust for income tax benefits.
• Section 80G: Allows donors to claim tax deduction on donations made.

Who Can Apply?

• Trusts, Societies, NGOs, and Section 8 Companies.
• The entity must have charitable objects benefiting the public at large.

Conditions for Tax Exemption under Section 11

A trust must:

1. Be formed for charitable or religious purposes.
2. Apply at least 85% of its income for such purposes.
3. Accumulate the remaining 15% or comply with conditions under Section 11(2) for excess accumulation.
4. Maintain separate books if engaged in business activities.
5. Invest only in prescribed modes under Section 11(5).
6. Ensure no part of the income benefits the settlor or specified persons.

Charitable Purpose under Section 2(15)

Includes:

• Relief of the poor
• Education
• Yoga
• Medical relief
• Preservation of the environment or monuments
• Advancement of any other object of general public utility (subject to limits on commercial receipts)

Key Registration Requirements

Form 10A & Form 10AB

• Trusts must apply electronically.
• Key attachments include trust deed, PAN, activity reports, registration proofs, and financials for the last three years.

Re-registration (Post-Modification)

If a trust changes its objectives, it must apply for fresh registration within 30 days in Form 10A, per Section 12A(1)(ab).

Recent Amendments (Effective 01.04.2022 Onward)

1. Corpus Donations: Cannot be treated as application of income unless reinvested back into corpus-specified modes.
2. Loan-based Applications: Treated as an application only upon repayment from income.
3. Excess Application Set-Off: Now disallowed.
4. Strict timelines for Form 10 and Form 9A filings.
5. Loss of Exemption: If income is misused or not used as per othe bjectives, tax benefits may be withdrawn.

Vivad Se Vishwas Act (2020): A Way Out for Litigating Trusts

This Act was introduced to resolve pending income tax disputes. Eligible cases include:

• Appeals filed by 31.01.2020.
• Matters pending with CIT(A), ITAT, HC, or SC.
• DRP directions without final assessment.

Benefits:

• Immunity from penalty and prosecution.
• Significant reduction in tax payable (as low as 25%-50% of disputed amounts).
• Fast resolution timeline.

Section 54 to 54F & 54B: Capital Gain Exemptions

Charitable trusts are also eligible for exemptions under these sections in specific cases:

• Section 54/54F: Long-term capital gains from residential property reinvested in another house.
• Section 54B: For agricultural land reinvestment.

Practical Challenges and Tips

• Always maintain separate bank accounts for corpus and operational funds.
• Avoid diversion of funds to related parties.
• Ensure prompt filing of Form 10B (Audit) and Form 10 (accumulation declaration).
• Revalidate your 80G and 12A registrations periodically as mandated.
• If in litigation, consider the Vivad Se Vishwas Scheme before proceeding with appeals.

Conclusion

The taxation and regulatory framework for charitable trusts is robust, with detailed compliance mechanisms. While the benefits are significant, such as exemption from income tax and enhanced donor confidence, they come with procedural and documentary obligations. A clear understanding of the latest amendments and practical implications is essential for continued compliance and sustainability.

For legal assistance, compliance services, or clarification, reach out to a qualified chartered accountant or taxation advisor familiar with charitable institutions.