Forms or Modes for Investing Funds of Charitable and Religious Trusts and Institutions [Section 11(5)]

1. Forms or Modes of Investment of Funds by Trusts [Section 11(5)]

A uniform pattern of investment is laid down, with effect from April 1, 1983, for all categories of funds belonging to charitable and religious trusts or institutions. The same pattern of investment will apply in relation to accumulation of income in excess of 15%.

The uniform forms or modes for investing funds of charitable and religious trusts and institutions are given below:

  1. Investment in Government Saving Certificates and any other Securities or Certificates issued by the Central Government under its Small Saving Scheme.

  2. Deposits with Post Office Savings Banks.

  3. Deposits with Scheduled Banks or Co-operative Banks (including a Cooperative Land Mortgage Bank or a Cooperative Land Development Bank).

  4. Investments in the units of Unit Trust of India.

  5. Investments in Central or State Government Securities.

  6. Investments in debentures issued by or on behalf of any company or corporation. However both the principal and interest thereon must have been guaranteed by the Central or the State Government.

  7. Investment or deposits in any public sector company.

    • An investment or deposit in a public sector company shall continue to be one of the eligible modes of investment for charitable or religious trusts, for a period of three years (in the case of shares), and till the date of maturity of other investment or deposit from the date a public sector company ceases to be a public sector company.
  8. Investment in bonds of approved financial corporation providing long term finance for industrial development.

  9. Investment in bonds of approved public companies whose principal object is to provide longterm finance for construction or purchase of houses in India for residential purposes.

  10. Investment in immovable property excluding plant and machinery, not being plant and machinery installed in a building for the convenient occupation thereof.

  11. Deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India.

  12. Explanation.—For the purposes of this clause,—

    1. long-term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;

    2. public company shall have the meaning assigned to it in section 3 of the Companies Act, 1956;

    3. urban infrastructure means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport.

  13. Deposits with the Industrial Development Bank of India.

  14. Any other form or mode of investment or deposit as may be prescribed.

2. Fund not Invested by Trusts in Section 11(5)

Income of a trust/institution is not eligible for exemption under section 11 or 12 if its funds are invested/deposited otherwise than in the forms specified in section 11(5).

In this regard the following points should be noted:

  1. The exemption under section 11(1)(a) is available only if at least 85 % of the income is applied for charitable/religious purposes in India during the year and the remaining amount is invested in the forms/ modes specified under section 11(5). Thus, both the requirements will have to be fulfilled before the trust can claim and avail of the exemption under section 11(1)(a).

Example :

A trust derives income from property held for charitable purposes to the extent of Rs. 40,000 in a year. Under section 11(1)(a) it has to spend at least Rs. 34,000 (i.e. 85% of Rs.40,000) on the charitable purposes. The balance of Rs. 6,000 will have to be invested in the forms/modes prescribed under section 11(5). It is only then that the entire income of the trust will get exemption—

  1. Any charitable or religious trust or institution will forfeit exemption from tax if any funds of the trust or institution are invested or deposited, after February 28, 1983, otherwise than in any one or more of the modes specified in section 11(5).Such trusts and institutions will also forfeit exemption from tax if any part of their funds invested before March 1, 1983 otherwise than in any one or more of the forms or modes specified in section 11(5), continue to remain so invested or deposited after November 30, 1983. Trusts or institutions which continue to hold any shares in a company [other than shares in a public sector company or shares which are prescribed as mode of investment under section 11(5)(xii)] after the said date will also forfeit exemption from income-tax.EXCEPTION – In the cases given below, Exemption is Not Forfeited even if funds are invested otherwise than in the Modes specified in section 11(5):
    1. The exemption is not denied in relation to assets held by the trust or institution where such assets form a part of the corpus of the trust or institution as on June 1, 1973.
    2. Similarly, exemption is not denied in relation to any accretion to the assets, being shares of a company forming part of the corpus of the trust or institution as on June 1, 1973, where such accretion arises by way of allotment of bonus shares.
    3. Exemption is not forfeited in relation to debentures† acquired by the trust or institution before March 1, 1983. Where debentures† of an Indian company are acquired by the trust or institution after February 28, 1983 but before July 25, 1991, the exemption from tax under section 11 will be denied only in respect of interest on such debentures†. If, however, such debentures† are not disinvested by March 31, 1992, the trust or institution will lose exemption under section 11.
    4. Exemption is not forfeited in relation to any funds representing the profits and gains of a business, if the trust/institution maintains separate books of account in respect of such business.
    5. Acceptance of donations in kind or acquiring any asset not conforming to the provision of section 11(5) will not make the fund or trust or institution lose tax exemption. The trust or institution shall be required to dispose of or convert the asset not conforming to the requirement of section 11(5) into permissible investment within one year from the end of the financial year in which such assets are acquired or March 31, 1993, whichever is later.