Section 11 Of Income Tax Act: Tax Exemptions for Trusts
Section 11 of the Income Tax Act (ITA) offers a special exemption for any income earned from properties owned by charitable trusts or organizations that are used for charitable or religious purposes. This is subject to a few guidelines and conditions
As per S.2(15) of the ITA, “charitable or religious purpose” encompasses aid to those in need. It includes people who are at a disadvantage, and other purposes such as education, preservation of monuments, conservation of the environment, preservation of places of historic and artistic significance, medical assistance, and other related activities.
Taxes are imposed on charitable organisations and trusts depending on the type of income or revenue generated. Under S.11, capital income from a house or property is one of the key sources of taxation on trust income. To be eligible for such deductions, individuals must be well-versed in S.11 of the ITA.
Charitable or religious organisations must use their income within India, as stipulated in section 11(1)(c) of the applicable regulations. This is typically adhered to unless they are
· Provided express permission to work abroad, or
· If their activities are aimed at advancing international welfare in which India has a
Read on to know more about the criteria required to qualify for tax rebates u/s S.11.
Key features of the tax provision u/s 11
The ITA, 1961 is comprised of a variety of exemptions. As per S.11, the following conditions must be met to be eligible for an exemption:
- The trust must be instituted, to satisfy legal requirements
- Income must be obtained from assets held totally or partially in trust (for properties owned in part, the exemption is only available if the non-profit organization was established before the tax year in question) for religious or humanitarian purposes in India.
- The income mentioned above should be used or saved up in India for these purposes.
- The total amount of money saved up or set aside for charity or religious reasons should be at most 15% of what was made or obtained the year before.
- The income-generating property should be placed in a charitable/religious trust registry.
- The property should be intended for charitable use exclusively.
- The trust must file with the Commissioner of Income Tax before the set time limit.
- The charitable trust should not be established with the intention of providing preferential assistance to any particular religious community or caste
- No portion of the proceeds from said charitable organizations or establishments should be utilized for the advantage of the settlor or any other designated persons, either indirectly or directly.
- The trust funds must be allocated or placed into the formats and modalities as outlined in section 11(5).
(Source: Conditions for Exemption under Section 11 in case of Charitable Trust (incometaxmanagement.com); Section 11 of Income Tax Act: Tax Exemptions on Specific Properties (navi.com))
Key Criteria as per S.11
Below are the key criteria for exemptions offered to Trusts, Trusts operating hospitals, educational organizations, and facilitating financial support:
- An organization/trust that seeks to benefit the impoverished or to further educational or medical causes shall be classified as charitable, despite its potential involvement in commercial activities
- The Bureau of Indian Standards’ role
· in regulating quality and safety through the establishment of standards for products and services,
· as well as the implementation of accreditation and supervision
cannot be construed as a trade, business, or commerce, even though the testing protocols may require payment.
- The initial clause of S.2 shall not apply to organizations established for the purpose of providing job placement services to ex-military personnel, their widows, and dependents, as opposed to any commercial, trading, or business venture
- No tax obligations are imposed on those operating a hospital for charitable purposes. Therefore, a foundation that provides such services is exempt from income tax.
- Any assessee organization that provides monetary support to educational institutions such as schools and colleges is exempt from taxation.
- S.11 exempts educational institutions, such as schools and colleges, from income tax notices.
S.11 of the ITA also outlines certain clauses that are subject to the provisions of S. 60-63 as provided below:
- The redistribution of funds without the exchange of a tangible asset.
- Revocable transfer of assets.
Additionally, any monetary assistance provided by the Central administration to a trust or organization formed by the Central Government or a State administration, as applicable, shall not be regarded as revenue.
(Source:Section 11 of the Income Tax Act – Exemption for Trusts (vakilsearch.com))
How to comply with the tax provisions u/s 11
To comply with the tax provisions under section 11, it is important to be aware of the various provisions and requirements. Claiming an exception under section 11 requires that the following vital requirements be met:
1. Trust must have been established for legitimate goals.
2. Such a trust or institution must serve religious or charitable objectives. Trusts and institutions advancing any other generally applicable goal may engage in commercial activity up to 20% of total receipts.
3. The income-generating assets should be held under a trust or legal obligation.
4. The assets ought to be kept for philanthropic or religious causes. The following additional requirements apply to charity trusts established on or after April 1, 1962:
(i) The trust shouldn’t be established to benefit a specific caste or religious group;
(ii) No portion of the revenue should be guaranteed either directly or indirectly for the
settlor’s or other designated parties’ benefit;
(iii) The assets ought to be entirely held for philanthropic purposes.
Religious trusts established on or after April 1, 1962, are subject to the conditions indicated in (ii) and (iii).
5. Income generated by the trust that is used for charitable or religious purposes, or has been legitimately saved within the confines of sections 11(1) and (2) of the act, is exempt from taxation.
6. Unless specified by section 11(1), the exemption applies only to the portion of revenue utilized for Indian charitable or religious activities.
7. The income reported in the accounts of trusts involving commercial activities must not be lower than what is determined by the Assessing Officer as per the Act. However, the tax exemption will not be applicable to religious or charitable trusts, unless
- The company is run by the trust exclusively for public religious objectives and consists of publishing or printing books of a type that the government has approved; or
- The institution operates the business exclusively for charitable reasons, and the institution’s beneficiaries do the bulk of the work related to the company;
and the trust/institution of such enterprise maintains separate books of account.
8. The trust must register online using Form No. 10A before applying to the
Commissioner of IT.
9. A trust or institution that has obtained registration to take advantage of exemption under section 11 and the registration is valid for the preceding year is not eligible for any exemption under the exceptions of section 10 for that prior year. (applicable from the fiscal year 2015-16).
10. For each accounting year in which the trust’s revenue exceeds the exemption limit, the trust’s books should be audited using Form No. 10B.
11. The trust’s capital should be allocated using any of the methods or instruments listed in section 11(5).
12. If the total revenue of the trust or institution exceeds the maximum amount that is not subject to tax, the return of income of the trust or institution must be submitted within the period specified under section 139(1).
13. If the trust holds a business enterprise, the conditions of section 11(4) shall apply. Conversely, if the trust chooses to engage in commercial activities, any income or profits generated from such activities cannot be exempted under section 11, unless the business is incidental.
Common errors to avoid while complying with S.11
As with any rule set, common mistakes are made when complying with the provisions of S. 11 of the IT Act. Therefore, it is important to be aware of these and ensure that you do not make any errors when submitting your documents.
The most common errors to look out for include:
- Failure to provide the necessary information requested in the form may result in a rejection
- Not submitting the documents in the correct format
- Failure to submit the form on time or at the right time
- Not maintaining proper records
- Failure in providing sufficient evidence of charitable activities
- Not providing complete information on the income and expenditure.
Finally, it is paramount that you keep track of all paperwork related to deductions, as this may come in handy should you need to present proof of compliance down the line. It is also important to ensure that all returns are reviewed regularly to identify discrepancies.
It is essential to bear in mind that S. 11 does not provide complete exemption from taxation on all forms of income. It only offers exemptions on selected payment types, such as capital gains and income from trusts. Deductions can only be claimed by the person responsible for paying taxes on the income generated from the property.
Examples with the context for S.11
Let us consider a few examples:
1) Revenue derived from a business or professional endeavour:
If a trust is registered as per section 12AA of the Income Tax Act
· Had an income of ₹10,00,000, and
· An expenditure of ₹ 800,000 with
· A reserve of ₹. 200,000
Would the trust be eligible for an exemption under section 11 of the same Act?
It would not be eligible with the current allocation of funds. This is because, 80% of the income (₹.8,00,000) has been utilized, which is below the recommended limit of 85%. 15% must be set aside as a reserve, leaving 85% to be used for religious or charitable purposes.
2) If the income assessed is lower than the income determined
The Trust “ABC” had earned a total of ₹10,00,000 in the previous year, yet had only received ₹8,00,000. The entire sum was utilized in the same year. Is it possible for the Trust to request a tax exemption under section 11?
In most cases, the answer would be No, as the trust has not used 85% of the amount generated, which is ₹ 8,50,000. However, by submitting Form 9A, the trust may be able to request an exemption with confirmation from the assessing officer.
3) Exemption applicable if the trust holds a business entity
The assessing officer determined that the institution named “Y” had an income of Rs. 15,00,000 from the business undertaking.
This was was higher than the amount of Rs. 10,00,000 disclosed in its books of accounts and claimed by the institution.
Thus, the remaining sum of ₹ 5,00,000 would have to be reported as taxable income by the trust or institution.
Frequently Asked Questions
Should I get an expert opinion before filing my taxes?
Yes. It is recommended to consult with a professional accountant or tax practitioner who can guide you through all the exemptions available under S.11 as per India’s prevailing tax laws.
What is the maximum amount of accumulation allowed under S.11 (2)?
As per S.11 (2), it is allowed to save more than 15% of your income. However, the maximum duration for such accumulation is 5 years. It is important to note that you cannot maintain income beyond 15% accumulated for longer than 5 years.
What are some of the exemptions under section 11?
These include income from house property, capital gains, and business or profession.
Does S.11 permit depreciation to be taken?
It is possible to claim any expenses including depreciation under this section without restriction. However, if the acquisition of an asset was treated as an application of income in the preceding year, then depreciation cannot be claimed in this section.