Taxability of donations made by trusts

Introduction

The article you’re viewing discusses significant changes to the regulations governing Charitable Trusts in India, effective from April 1, 2024. These amendments shall have effect on donations given by a charitable or religious trust whether by way of corpus donation or not.

Legal Provisions-

Income of any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or subclause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 of the Income-tax Act, 1961 (the Act) (hereinafter referred to as the first regime) or any trust or institution registered u/s 12AA or 12AB of the Act (hereinafter referred to as the second regime) is exempt, subject to the fulfilment of certain conditions provided for the two regimes in the Act. These conditions inter-alia include the following for the entities (hereinafter referred to as trust / institution in the two regimes):-

(a) at least 85% of income of the trust / institution should be applied during the year for the charitable or religious purposes;

(b) Trusts or institutions are allowed to apply mandatory 85% of their income either themselves or by making donations to the trusts with similar objectives; and

(c) If donated to other trust / institution, the donation should not be towards corpus to ensure that the donations are applied by the donee trust / institution for charitable or religious purposes.

2. In order to ensure intended application towards charitable or religious purposes, Finance Act, 2023 has provided that eligible donations made by a trust / institution shall be treated as application for charitable or religious purposes only to the extent of 85% of such donations. Accordingly, Finance Act, 2023 has made the following amendments:-

(a) inserted clause (iii) in Explanation 2 to third proviso of clause (23C) of section 10 of the Act;

(b) inserted clause (iii) in Explanation 4 to sub-section (1) of section 11 of the Act.

These amendments read as under:-

(a) clause (iii) in Explanation 2 to third proviso of clause (23C) of section 10

"any amount credited or paid out of the income of any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or subclause (via), other than the amount referred to in the twelfth proviso, to any other fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via), or trust or institution registered under section 12AB, as the case may be, shall be treated as application for charitable or religious purposes only to the extent of eighty-five per cent of such amount credited or paid"

(b) clause (iii) in Explanation 4 to sub-section (1) of section 11

any amount credited or paid, other than the amount referred to in Explanation 2, to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, or other trust or institution registered under section 12AB, as the case may be, shall be treated as application for charitable or religious purposes only to the extent of eighty-five per cent of such amount credited or paid

Interpretation-

Until the end of the fiscal year on March 31, 2023, a trust could donate to another trust with similar objectives and receive a full tax deduction. However, according to the new amendment effective from April 1, 2023, when a trust donates to another trust, the donating trust will only receive a partial tax deduction. This implies that the remaining 15% of the donation will be subject to a tax rate of 30%.

Let’s illustrate this with an example. Trust ‘B’ has donated Rs. 75,00,000 out of its current year’s income of Rs. 1,20,00,000 and spent Rs. 30,00,000 towards the trust’s objectives. This results in a taxable income of Rs. 15,00,000. However, according to section 11(1)(a)/(b), 85% of its income derived from the property held under trust or institutions wholly for charitable or religious purposes is exempt if it is applied to such purposes in India. Here’s how the calculation works:

• Gross receipts: Rs. 1,20,00,000

• 15% exemption under section 11(1)(a)/(b): Rs. 18,00,000

• Remaining amount: Rs. 1,02,00,000

• Amount spent for the objectives of the Trust: Rs. 30,00,000

• Balance after expenditure: Rs. 72,00,000

• Less Donation to another Trust Rs.75,00,000 x 15%: Rs. 63,75,000

• Taxable Income: Rs. 8,25,000

Detailed Table Explaining the provisions-

Circular No. 03/2024 [F. No.370142/5/2024-TPL] Dated 06th March, 2024, Tabulates the aforesaid provisions as under-

Clarification w.r.t. doubts on accumulation of 15% which is not treated as application-

Circular clarifies this as under-

“ 3. Representations have been received raising the concern that whether the balance 15% of donation to other trust / institution would be taxable or is eligible for 15% accumulation since the funds would not be available having been already disbursed.

4. The matter has been examined with reference to the issues raised in paragraph 3 and it is reiterated that eligible donations made by a trust / institution to another trust / institution under any of the two regimes referred to in para 2 shall be treated as application for charitable or religious purposes only to the extent of 85% of such donations. It means that when a trust / institution in either regime donates Rs. 100 to another trust / institution in either regime, it will be considered to have applied 85% (Rs. 85) for the purpose of charitable or religious activity. It is clarified that 15% (Rs. 15) of such donations by the donor trust / institution shall not be required to be invested in specified modes under section 11(5) of the Act as the entire amount of Rs. 100 has been donated to the other trust / institution and is accordingly eligible for exemption under the first or second regime.”