Tax treatment of Public Charitable/Religious Trust

In the following cases income of a charitable/religious trust which is not exempt under section 11 or 12 is chargeable to tax as if it is the income of an association of persons:

  1. income from property held under trust wholly for charitable or religious purposes;
  2. voluntary contributions without any direction that they shall form a part of the corpus of trust; or
  3. income of trust or institution being profits and gains of business which is incidental to the attainment of the objectives of trust and separate books of account are maintained.
Assessment of 'Trust'
Assessment of ‘Trust’

1. Levy of Tax at Maximum Marginal Rate (MMR) in case of Public Charitable and Religious Trusts which Forfeit Tax Exemption –

Charitable or religious trusts, which may otherwise be eligible for tax exemption, are liable to forfeit this exemption in the following circumstances, namely:

  1. Where the trust is created after March 31, 1962, any part of the income of the trust enures, under the terms of the trust deed, directly or indirectly, for the benefit of specified categories of persons such as, the author of the trust, trustee or manager of the trust, substantial contributor to the trust and any relative of such author, trustee, etc.
  2. Any part of the income or any property of the trust (whenever created) is used or applied during the relevant year, directly or indirectly, for the benefit of specified categories of persons.
  3. The trust funds (with certain exceptions) are invested in contravention of the investment pattern of such funds .

Where a charitable or religious trust forfeits tax exemption in the circumstances mentioned at (1) to (3) above, the trust shall be charged to tax at the maximum marginal rate (i.e., 35.535 % for the assessment year 2018-19 and 35.88 % for the assessment year 2019-20).

2. Levy of Tax at the Maximum Marginal Rate (MMR) where a Charitable Trust Ceases to Exist or Converts into a Non-Charitable Entity [Section 115TD] –

Section 115TD is inserted with effect from June 1, 2016. This section provides for levy of additional income-tax in case of conversion into, or merger with, any non-charitable form or on transfer of assets of a charitable organisation on its dissolution to a non-charitable institution. The elements of the regime are—

  1. The accretion in income (accreted income) of the trust or institution shall be taxable on conversion of trust or institution into a form not eligible for registration under section 12AA or on merger into an entity not having similar objects and registered under section 12AA or on non-distribution of assets on dissolution to any charitable institution registered under section 12AA or approved under section 10(23C) within a period of 12 months from dissolution.

  2. For the above purpose, a trust or institution shall be deemed to have been converted into any form (not eligible for registration under section 12AA) in a previous year, if –

    1. the registration granted to it under section 12AA has been cancelled; or

    2. it has modified its objects and not applied for fresh registration (or fresh registration application has been rejected).

  3. Accreted income shall be amount of aggregate of total assets as reduced by the liability as on the specified date (mode of valuation is yet to be notified). The asset and the liability of the charitable organisation which have been transferred to another charitable organisation within specified time will be excluded while calculating accreted income.

  4. So much of the accreted income as is attributable to the following asset and liability, if any, related to such asset shall be ignored for the purposes of computation of accreted income –

    – Any asset which is established to have been directly acquired by the trust or institution out of agricultural income as is referred to in section 10(1).

    – Any asset acquired by the trust/institution during the period beginning from the date of its creation and ending on the date from which the registration under section 12AA became effective or deemed effective (however, this rule is valid only if the trust/institution has not been allowed any benefit of sections 11 and 12 during the said period). “Deemed” effective covers a case where due to first proviso to section 12A(2) the benefit of sections 11 and 12 have been allowed to the trust/institution in respect of any previous year prior to the year of registration.

  5. The taxation of accreted income shall be at the maximum marginal rate (i.e., 35.535 % for the assessment year 2018-19 and 35.88 % for the assessment year 2019-20).

  6. This levy shall be in addition to any income chargeable to tax in the hands of the entity.

  7. This tax shall be final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it shall be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.

  8. In case of failure of payment of tax within the prescribed time a simple interest @ 1 % per month (or part of it) shall be applicable for the period of non-payment.

  9. For the purpose of recovery of tax and interest, the principal officer or the trustee and the trust or the institution shall be deemed to be assessee in default and all provisions related to the recovery of taxes shall apply. Further, the recipient of assets of the trust, which is not a charitable organisation, shall also be liable to be held as assessee in default in case of non-payment of tax and interest. However, the recipient’s liability shall be limited to the extent of the assets received.