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.
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:
Below are the key criteria for exemptions offered to Trusts, Trusts operating hospitals, educational organizations, and facilitating financial support:
S.11 of the ITA also outlines certain clauses that are subject to the provisions of S. 60-63 as provided below:
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.
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
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.
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:
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.
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.
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.
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.
These include income from house property, capital gains, and business or profession.
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.
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 5+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.
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