Charitable and Religious Trusts
Exemption to Educational, Medical, Charitable and Religious Institutions under Section 10(23C)
Introduction
Section 10(23C) of the Income-tax Act provides tax exemption to specific funds and institutions engaged in educational, medical, charitable, or religious activities. The exemption is available either unconditionally or subject to approval and fulfilment of prescribed conditions.
Scope of Section 10(23C)
This clause exempts the income of specified institutions from total income. It applies to:
- Certain Government-established funds (unconditionally exempt);
- Educational and medical institutions substantially financed by the Government or with annual receipts not exceeding Rs. 5 crore;
- Other eligible institutions, upon approval by the Principal Commissioner or Commissioner.
Categories of Exempt Institutions
- Institutions Not Requiring Approval
The following are exempt unconditionally or based on defined thresholds:
Funds under sub-clauses (i) to (iiiaaaa), including:
➢ Prime Minister’s National Relief Fund
➢ PM CARES Fund
➢ PM Fund for the promotion of Folk Art
➢ PM Aid to Students Fund
➢ National Foundation for Communal Harmony
➢ Swachh Bharat Kosh
➢ Clean Ganga Fund
➢ Chief Minister’s Relief Fund
➢ Lieutenant Governor’s Relief Fund
Educational and medical institutions under sub-clauses (iiiab) to (iiiae) that are:
➢ Wholly or substantially financed by the Government, or
➢ Having annual receipts not exceeding Rs. 5 crore.
- Institutions Requiring Approval
Exemption under the following sub-clauses is available only upon approval by the Principal Commissioner or Commissioner:
Sub-clause (iv): Funds or institutions established for charitable purposes
Sub-clause (v): Trusts or institutions wholly for public religious or public religious and charitable purposes
Sub-clause (vi): Universities or educational institutions existing solely for education and not for profit
Sub-clause (via): Hospitals or institutions for medical or rehabilitative care operating solely for philanthropic purposes and not for profit
Conditions for Claiming Exemption
- Approval by Competent Authority
Institutions claiming exemption under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) must apply for approval in the prescribed form and manner. Approval can be provisional (up to 3 years) or final (up to 5 years). Approval becomes inoperative if the institution is notified under Section 10(46) or 10(46A).
Note: No new applications for approval or provisional approval under Section 10(23C) shall be entertained on or after 01-10-2024. The approval shall be granted by the Principal Commissioner or Commissioner only if the application for approval is made before 01-10-2024. Existing approvals remain valid until expiry, after which the institution may apply under the Section 12A regime.
- Computation of Income
The manner of computation differs depending on whether the institution requires approval.
Computation for Institutions not requiring Approval
➢ Includes Government funds and educational/medical institutions.
➢ Government funds are exempt without return filing.
➢ Educational and medical institutions must file returns under Section 139(4C), but are allowed unrestricted accumulation of income.
➢ No threshold limit or specific time for application of income applies.
Computation for Institutions Requiring Approval
➢ Income includes donations and receipts from main and incidental objects.
➢ Deduct application of income (revenue/capital expenditure, permitted corpus usage, loan repayments).
➢ Accumulation allowed:
o Up to 15% of income without restriction
o Additional accumulation for 5 years, subject to compliance.
Additional Inclusions:
➢ Disallowances for TDS default, cash payments, or misuse of accumulated income
➢ Anonymous donations (taxable under Section 115BBC)
Key Points in Income Computation
➢ Inclusions: All income under Section 2(24), including donations.
➢ Commercial Activities:
o Must be incidental and supported by separate books.
o For ‘general public utility’ objects, commercial receipts must not exceed 20% of total receipts.
➢ Anonymous Donations: Taxable if exceeding limits prescribed in Section 115BBC.
➢ No Other Exemptions: Only agricultural income is excluded.
➢ No Deduction for:
o Corpus donations given to other institutions
o Expenditure out of corpus or loans (unless repaid and reinvested as per rules)
o Payments exceeding Rs. 10,000 made in non-permissible modes
o Payments without TDS (30% disallowed)
o Benefits to related persons under Section 13(3)
➢ Claim of Depreciation: Not allowed on assets acquired from income already treated as application.
➢ Set-off of Losses: Not permitted for excess application from prior years.
➢ Application on Payment Basis: Allowed in the year of actual payment only.
➢ Accumulation: Permissible up to 15%, or for specific purposes for 5 years.
Treatment of Special Receipts
➢ Corpus Donations: Exempt if invested in Section 11(5) modes.
➢ Voluntary Donations for Religious Renovations: May be treated as corpus if conditions are met.
➢ Donations in Kind: Counted as income and treated as an application if used for charitable purposes.
Special Computation Scenarios – Applicable when books are not maintained, accounts are not audited, return not filed, or conditions of Section 2(15) are violated:
➢ Only revenue expenditure allowed, excluding:
o Expenditure from the corpus or loans
o Capital expenses
o Depreciation on assets which have already been claimed as application
o Payments in cash or without TDS
o Donations to others
➢ No deduction shall be allowed in respect of any expenditure or allowance or set-off of any loss under any other provision of the Act.
- Investment of Funds
Funds must be invested in modes specified under Section 11(5), except for certain grandfathered or notified assets. Non-compliance renders the relevant income taxable under Section 115BBI.
- Books of Account
Institutions having income before exemption exceeding the basic exemption limit must maintain books of account in the prescribed form and manner.
- Audit Requirement
Audit by a Chartered Accountant is mandatory for institutions having income before exemption exceeding the basic exemption limit, and the report (Form 10B or 10BB) must be filed one month before the due date under Section 139(1).
- Filing of Return
Institutions must file their return within the timelines under Section 139(1) or 139(4). Exemption is not allowed if the return is filed under Section 139(8A).
- Other Provisions
Mutual Exclusivity with Section 11/12 – Institutions must choose between registration under Section 12AB and approval under Section 10(23C); both cannot be availed simultaneously.
Tax on Anonymous Donations – Taxable under Section 115BBC if exceeding Rs. 1 lakh or 5% of total donations. Only the excess is taxed.
Merger of Trusts – Merger is allowed under Section 12AC, subject to conditions. Chapter XII-EB does not apply if conditions are fulfilled.
Tax on Accreted Income – Tax is levied at the maximum marginal rate in cases of conversion, merger with non-eligible entities, or non-transfer of assets on dissolution.
Special Tax Rate under Section 115BBI – Specific incomes not qualifying for exemption are taxed at special rates, including income not applied for charitable purposes or invested in impermissible modes.
Accumulation of Income by Fund or Institution Approved under Section 10(23C)
Funds or institutions approved under Section 10(23C) may accumulate income for future application to specified purposes, subject to prescribed conditions. Accumulation beyond 15% requires a declaration and compliance with investment norms.
- Conditions for Accumulation
Income accumulated in excess of 15% shall not be included in total income if the following are satisfied:
A statement in Form 10 is submitted, specifying the purpose and period of accumulation;
The accumulated amount is invested in modes specified under Section 11(5);
Form 10 is furnished on or before the due date under Section 139(1) for filing the return of income.
- Period of Accumulation
The maximum period for which income can be accumulated is 5 years. Any period during which the application is stayed by a court order is excluded from this period.
- Taxation of Accumulated Income
Accumulated income shall be taxed if:
Applied for purposes other than the approved objects;
Ceases to be accumulated;
Ceases to remain invested in specified modes;
Not utilised within the stipulated 5-year period;
Credited or paid to another registered or approved institution.
- Change in Purpose of Accumulation
If accumulated income cannot be applied for its original purpose due to uncontrollable circumstances, the institution may apply to the Assessing Officer for a change in purpose, subject to:
The new purpose being within India;
The new purpose aligns with the institution’s approved objects;
No payment is made to other trusts or institutions registered under Section 12AB/12AA or approved under Section 10(23C).
Cancellation of Approval under Section 10(23C)
Approval or provisional approval granted under Section 10(23C) may be cancelled by the Principal Commissioner or Commissioner (PCIT/CIT) if a “specified violation” is found to have occurred in any previous year.
- Grounds for Cancellation
The PCIT/CIT may initiate cancellation in the following cases:
On detecting one or more specified violations during any previous year;
On receipt of a reference from the Assessing Officer under the second proviso to Section 143(3);
If the case is selected under the Board’s risk management strategy.
- Specified Violations
A fund or institution shall be considered in violation if:
Income is applied for purposes other than the approved objects;
It has business income not incidental to its objectives;
It fails to maintain separate books for incidental business;
Its activities are not genuine or not aligned with the approval conditions;
It fails to comply with any material legal requirement, and such failure is established by a final order or decree;
The application for approval is incomplete or contains false or incorrect information.
- Procedure for Cancellation
The PCIT/CIT must:
Call for information or conduct inquiries to verify any specified violation;
Provide the institution with a reasonable opportunity of being heard;
If satisfied of a violation, pass a written order cancelling the approval for the relevant and subsequent years;
If not satisfied, pass a written order refusing cancellation.
A copy of the order must be forwarded to the Assessing Officer and the concerned institution.
- Time Limit for Passing Order
The cancellation or refusal order must be passed within 6 months from the end of the quarter in which the first notice seeking documents or information was issued.
Taxation of Charitable and Religious Trusts
Introduction
Charitable and religious trusts are eligible for exemption under Sections 11 to 13 of the Income-tax Act, subject to registration under Section 12AB and compliance with prescribed conditions. Section 10(23C) also provides an exemption for certain specified institutions.
Exemption under Section 10(23C)
Exemption is available to specified funds or institutions (e.g., PM CARES, educational institutions, hospitals, charitable or religious institutions). No new application for approval under Section 10(23C) is permitted to be filed on or after 01.10.2024. The approval shall be granted by the Principal Commissioner or Commissioner only if the application for approval is made before 01-10-2024. Existing approvals remain valid until expiry, after which the institution may apply under the Section 12A regime.
Exemption under Sections 11 and 12
Income from property held under trust is exempt if applied/accumulated for charitable/religious purposes and other specified conditions are fulfilled under Sections 11 to 13.
- Meaning of Charitable Purpose [Section 2(15)]
Section 2(15) of the Income-tax Act defines “charitable purpose” through seven limbs—six specific and one general. The last limb, “advancement of any other object of general public utility, ” restricts commercial activities beyond a prescribed threshold.
▪ Relief of the Poor
▪ Education
▪ Yoga
▪ Medical Relief
▪ Preservation of Environment, including watersheds, forests, and wildlife
▪ Preservation of Monuments or Artistic/Historic Objects
▪ Advancement of any other object of General Public Utility – A residuary category covering other charitable purposes. However, if activities involve trade, commerce or business (or related services) for a fee, it ceases to be a charitable purpose unless:
➢ Such activity is undertaken in actual advancement of the object; and
➢ Aggregate receipts from such activity do not exceed 20% of the total receipts of the trust during that previous year.
This restriction does not apply to the first six limbs of charitable purpose, which can carry out business activities without the 20% cap if incidental to their objects.
- Conditions for claiming exemption
Section 12A prescribes the conditions that a charitable institution must fulfil to be eligible for exemption under Sections 11 and 12. Among these essential conditions are registration under Section 12AB, maintenance of books of account, audit of accounts, and filing of the income tax return.
- Procedure for Registration of Trusts
Section 12AB governs the registration of charitable or religious trusts. Registration is mandatory to claim exemptions under Sections 11 and 12. The new regime includes provisional registration (valid up to 3 years) and final registration (granted for 5 or 10 years). Trusts registered before 31-03-2021 under Section 12AA must re-register under Section 12AB.
▪ Scheme of Registration under Section 12AB – Registrations fall into three categories:
➢ Re-registration of Existing Trusts [Section 12AB(1)(a)]
➢ Normal Registration [Section 12AB(1)(b)]
➢ Provisional Registration [Section 12AB(1)(c)]
▪ Re-registration of Existing Trusts – Trusts with registration under Section 12A/12AA must apply for re-registration in Form 10A . The deadline, initially 30-06-2021, has been extended to 30-06-2024.
➢ PCIT/CIT must grant registration within 3 months without conducting enquiries.
➢ Validity: 5 years (or 10 years if eligible).
▪ Normal Registration – Applicable in the following cases:
➢ Renewal of expiring registration
➢ Conversion from provisional to regular registration
➢ Reactivation of inoperative registration
➢ Modification of objects
➢ Direct registration after commencement of activities
➢ Application must be filed in Form 10AB within the stipulated timelines.
➢ PCIT/CIT may conduct enquiries and verify the genuineness of activities and compliance with applicable laws.
➢ Registration is granted or denied within 6 months from the end of the quarter in which the application is received.
➢ Validity: 5/10 years.
▪ Provisional Registration – Applicable where the trust has not commenced activities.
➢ Application to be filed in Form 10A at least one month before the relevant previous year.
➢ PCIT/CIT must grant provisional registration within one month.
➢ Validity: 3 years from the assessment year for which registration is sought.
➢ Must be converted to regular registration at least 6 months before expiry or within 6 months of activity commencement.
▪ Condonation of Delay – Delayed applications under any clause of Section 12A(1)(ac) may be condoned by the PCIT/CIT if reasonable cause is shown.
▪ Extended Validity for Small Trusts [Finance Act, 2025] – Trusts applying under sub-clauses (i) to (v) of Section 12A(1)(ac) with total income (before exemption under Sections 11/12) not exceeding Rs. 5 crore in each of the 2 preceding years shall be granted registration for 10 years.
This extended validity applies to registrations granted on or after 01-04-2025.
▪ Ineligible for Extended Validity – The 10-year registration is not available for first-time applicants under Section 12A(1)(ac)(vi), i.e.:
➢ Trusts applying for provisional registration before commencing activities
➢ Trusts seeking direct registration after commencing activities
- Form for Registration of Trust underSection 12AB
Trusts or institutions seeking exemption under Sections 11 and 12 must register under Section 12AB using Form 10A or Form 10AB . These forms are filed electronically using a Digital Signature Certificate (DSC) or an Electronic Verification Code (EVC), as applicable.
▪ Form 10A :
➢ For re-registration of trusts registered under Section 12A or 12AA before 01-04-2021
➢ For provisional registration
▪ Form 10AB :
➢ For renewal of registration
➢ Conversion of provisional registration into regular registration
➢ Activation of inoperative registration
➢ Registration after modification of objects
➢ Direct regular registration post commencement of activities
These forms are also used for applications under Section 10(23C), Section 35, and Section 80G(5).
▪ Filing and Processing of Form 10A – Applications in Form 10A are processed by the Director of Income-tax (CPC), Bengaluru, who issues the order in Form 10AC and allocates a 16-digit Unique Registration Number (URN). If the application is incomplete or contains false information, registration may be cancelled after a hearing.
▪ Documents Required with Form 10A
➢ Self-certified copies of the founding instrument or documents of creation
➢ Relevant registration certificates (RoC, FCRA, prior approvals, etc.)
➢ Annual accounts (last 3 years if applicable)
➢ Nil declarations or affidavits if certain documents are not available
▪ Filing and Processing of Form 10AB – Filed for renewal or conversion to regular registration. The PCIT/CIT may issue notices for further documents or clarification. The final order is issued in Form 10AD along with the URN.
▪ Documents Required with Form 10AB
➢ Founding documents
➢ Past registration or rejection orders
➢ Annual accounts (up to 3 preceding years)
➢ Audit reports (if applicable under Section 44AB)
➢ Note on activities and modified object documents (if applicable)
▪ Conditions for Order Granting Registration – Conditions applicable to orders in Form 10AC or Form 10AD include:
➢ Income must be applied in line with the trust’s objects
➢ Business income must be incidental and separately accounted for
➢ No application of income for private religious purposes or specific religious communities
➢ Compliance with other applicable laws
➢ No non-genuine or non-compliant activities
➢ Application must contain complete and correct information
➢ Application must be filed within prescribed timelines in case of changes to objects or upon commencement of activities
▪ Mode of Filing and Verification – Forms must be submitted electronically. If return filing is by DSC, forms must also be submitted with DSC; otherwise, EVC may be used. The form must be verified by a person authorised under Section 140.
- Cancellation of Trust Registration underSection 12AB
The exemption under Sections 11 and 12 is available only if the trust or institution holds valid registration under Section 12AB. The Principal Commissioner or Commissioner may cancel such registration under the provisions of Section 12AB(4)/(5).
▪ Scope of Cancellation – The following registrations may be cancelled:
➢ Final or provisional registration under Section 12AB(1)(a)/(b)/(c)
➢ Final registration under Section 12AA(1)(b)
▪ Circumstances for Cancellation – Registration may be cancelled upon:
➢ Suo moto notice by PCIT/CIT on observing a specified violation
➢ Reference from the Assessing Officer
➢ Case selection under Risk Management Strategy as per Section 135A
▪ Specified Violations Include
➢ Application of income not aligned with the trust’s objects
➢ Income from non-incidental business activities
➢ Non-maintenance of separate books for incidental business
➢ Income applied for private religious purposes or a particular religious community/caste
➢ Non-genuine activities or non-compliance with registration conditions
➢ Non-compliance with applicable laws, confirmed by final order or decree
➢ Furnishing false or incorrect information in the application for registration
Note: As per the amendment by the Finance Act, 2025 (w.e.f. 01-04-2025), incomplete applications will not be treated as specified violations. However, applications containing false or incorrect information will still attract cancellation proceedings.
▪ Procedure for Cancellation
➢ PCIT/CIT may call for documents or make inquiries to verify the violation
➢ An order shall be passed in writing, either cancelling or refusing to cancel registration, after providing an opportunity of being heard
➢ Order to be forwarded to the Assessing Officer and the concerned trust/institution
▪ Timeline for Passing Cancellation Order—The cancellation order must be passed within 6 months from the end of the quarter in which the first notice is served.
▪ Consequences of Cancellation
➢ Loss of exemption under Sections 11 and 12
➢ Computation of Income under normal provisions
➢ Cancellation of approval under Section 80G
➢ Accreted income taxed under Section 115TD
- Accumulation of Income by Trust
A trust registered under Section 12AA or Section 12AB must apply at least 85% of its income for charitable or religious purposes in India. If not applied, the income can still be considered as applied under specific provisions, provided prescribed declarations are submitted and the funds are invested in modes specified under Section 11(5). Failure to utilise such accumulated income within permitted timelines or for approved purposes may result in withdrawal of the exemption.
▪ Modes of Accumulation
➢ Statutory Accumulation: Up to 15% of income can be accumulated indefinitely without conditions.
➢ 5-Year Accumulation [Section 11(2)]: Shortfall from the 85% application requirement can be accumulated for up to 5 years if Form 10 is filed at least two months prior to the due date of return filing under Section 139(1).
➢ Deemed Application [Section 11(1), Explanation 1(2)]: If income cannot be applied due to non-receipt or other reasons, it may be deemed to be applied if Form 9A is filed at least two months prior to the due date under Section 139(1).
Note: CBDT Circular No. 6/2023, dated 24-5-2023, clarified that the benefit of deemed application and Accumulation shall be available if Form 9A and 10 are submitted on or before the due date for filing the return under Section 139(1).
▪ Conditions for Accumulated Income – Accumulated income must:
➢ Be invested in modes specified under Section 11(5); and
➢ Be applied only for the purposes for which it was accumulated.
Use for any other purpose, or non-utilisation, results in the withdrawal of the exemption, and such income becomes taxable under Section 115BBI.
▪ Utilisation in Exceptional Cases [Section 11(3A)] – If accumulated income cannot be applied as planned due to reasons beyond control, the Assessing Officer may permit application for other aligned purposes within the trust’s objects. However, such amounts cannot be credited or paid to any other trust/institution (including those under Section 10(23C)), unless in the year of dissolution.
▪ Taxation of Accumulated Income [Section 11(3)] – Accumulated income shall be deemed to be income and taxed under Section 115BBI in the following cases:
➢ Applied for purposes other than charitable/religious;
➢ Ceases to remain invested in Section 11(5) modes;
➢ Not utilised within the permitted 5-year period;
➢ Credited or paid to any other trust or institution (registered under Section 12AA/12AB or approved under Section 10(23C)(iv)-(via)).
- Maintenance of Books of Account and Other Documents by Trust or Institution
A trust or institution claiming exemption under Section 11/12 or Section 10(23C) must maintain prescribed books of account and specified records, including those related to contributions, income application, donations, investments, borrowings, specified persons, and projects. These records must be preserved at the registered office for 10 years.
As per Rule 17AA , the following records must be maintained by trusts or institutions registered under Section 12AB or approved under Section 10(23C):
▪ Books of Account to be Maintained
➢ Cash book, ledger, journal
➢ Serially numbered bills and receipts issued and received
➢ Any other book necessary to provide a true and fair view of affairs
These are also required for business undertakings under Section 11(4).
▪ Records of Contributions – Trusts must maintain detailed records of all contributions, including corpus donations and funds for renovation of notified religious places. Required details:
➢ Name, address, PAN and Aadhaar (if available) of the donor
▪ Records of Income Application – Records must detail application of income in India/outside India, deemed applications, and corpus utilisation. Required information includes:
➢ Amount, recipient details, purpose of application
➢ Additional records for application out of accumulation and deemed application
▪ Records of Donations Made – Details of amounts paid to other registered/approved institutions must be maintained, along with:
➢ Name, address, and PAN of the recipient
➢ Purpose of donation
▪ Records of Investments and Deposits – Investments made from current income, accumulated funds, corpus, or specific donations must be tracked. Separate records are required for amounts invested in permissible and non-permissible modes under Section 11(5).
▪ Records of Income Accumulation – Details of the purpose and period for which income is accumulated must be recorded when 85% of the income is not applied during the year.
▪ Records of Loans and Borrowings – Details must include amount, dates, lender information, repayment status, and application of such funds in current or earlier years.
▪ Records of Properties – Separate documentation is required for:
➢ Immovable properties (type, address, acquisition cost, registration, transfer details, reinvestment of net consideration)
➢ Movable properties (type and acquisition cost)
▪ Records of Specified Persons [Section 13(3)] – To prevent exemption withdrawal, records must detail:
➢ Identity and transactions with specified persons
➢ Evidence that no undue benefit was conferred
▪ Records of Income and Projects – Must include:
➢ Income from property and other sources
➢ Name, address, and objective of each project or institution run by the trust
▪ Form and Place of Maintenance – Books may be kept in written, electronic, or digital form (including printouts or electromagnetic storage). They must be kept at the registered office or another place in India after passing a board resolution and notifying the Assessing Officer within 7 days.
▪ Retention Period – Books must be preserved for 10 years from the end of the relevant assessment year. If the assessment is reopened under Section 147, records must be retained until finalisation.
To claim exemption under Sections 11 and 12 or Section 10(23C), trusts and institutions registered under Section 12AB or approved under Section 10(23C) must get their accounts audited if their income exceeds the basic exemption limit. The audit report must be submitted in Form 10B or Form 10BB , depending on specified conditions.
▪ Deadline to file Audit Report – The audit report must be furnished at least one month prior to the due date of filing the return of income under Section 139(1).
▪ Form 10B – When Applicable – Trusts or institutions must file Form 10B if any of the following conditions are satisfied:
➢ Total income (before claiming exemption under Sections 11, 12, or Section 10(23C)(iv), (v), (vi), (via)) exceeds Rs. 5 crore during the previous year;
➢ Foreign contribution has been received during the previous year;
➢ Any part of the income has been applied outside India.
▪ Form 10BB – When Applicable – Form 10BB must be filed where all the following conditions are met:
➢ Total income (before exemptions under Sections 11, 12, or Section 10(23C)(iv), (v), (vi), (via)) is up to Rs. 5 crore;
➢ No foreign contribution was received during the previous year;
➢ No part of the income is applied outside India.
- Filing of Income Tax Return by Trusts or Institutions
The trusts or institutions registered under Section 12AB are required to file a return of income under Section 139(4A) if the total income, without giving effect to the provisions of Sections 11 and 12, exceeds the maximum amount that is not chargeable to Income-tax. The return of income is to be filed within the time allowed under Section 139(1) or Section 139(4).
- Statutory Forms of Investment or Deposit underSection 11(5)
Section 11(5) specifies the permissible modes of investment or deposit for funds held by trusts or institutions claiming income-tax exemption under various provisions. The objective is to ensure safe and regulated deployment of unutilised income until it is applied for charitable or religious purposes.
▪ Applicability – The following entities must invest or deposit their income in the prescribed modes until utilisation:
➢ Research associations [Section 10(21)]
➢ Employee welfare funds [Section 10(23AAA)]
➢ Institutions approved under Section 10(23C)
➢ Charitable or religious trusts claiming exemption under Sections 11 and 12
▪ Funds Required to be Invested in Permissible Modes
➢ Voluntary contributions (including corpus)
➢ Corpus contributions for renovation/repair of notified religious places
➢ Accumulated income under Section 11(2)
▪ Permissible Modes of Investment or Deposit – The funds must be parked in any of the following:
➢ Immovable Property
➢ Government Savings Certificates
➢ Post Office Savings Bank Deposits
➢ Bank Accounts with Scheduled or Cooperative Banks
➢ Units of UTI or Other Mutual Funds
➢ Central/State Government Securities
➢ Debentures of any Corporate Body Guaranteed by the Central or State Government
➢ Deposits in Public Sector Companies
➢ Bonds eligible under Sections 36(1)(vii) or 36(1)(viii)
➢ Deposits with IDBI
➢ Deposits or Investments with Urban Infrastructure Finance Companies
➢ Public Account of India
➢ Authorities established for Housing or Urban Development
➢ Equity Shares of Depositories or Incubatees
➢ Certain Securities by a Recognised Stock Exchange
➢ Shares of National Skill Development Corporation
➢ Debt Instruments of RBI-registered Infrastructure Finance Companies
➢ Sovereign Gold Bonds
➢ Equity or Bonds of Approved Digital Payment Companies or ONDC Ltd.
➢ Units of POWERGRID Infrastructure Investment Trust
▪ Consequences of Non-Compliance
➢ For trusts registered under Section 12AB or approved under Section 10(23C), failure to invest or deposit income in the prescribed modes renders such income taxable under Section 115BBI.
➢ For other entities under Sections 10(21) or 10(23AAA), exemption is denied if investments are not in permissible forms.
- Benefit to Interested Person by a Charitable or Religious Trust
No exemption under sections 11 or 12 shall be available to a charitable or religious trust or institution to the extent its income is applied, directly or indirectly, for the benefit of any interested person.
▪ Circumstances Affecting Exemption – Section 13 provides that the exemption under sections 11 or 12 is withdrawn to the extent that income:
➢ Enures directly or indirectly for the benefit of an interested person; or
➢ Is used or applied for the benefit of such person during the previous year.
Only the amount so applied or used is denied exemption; the remaining income retains its eligibility.
▪ Definition of Interested Person [Section 13(3)] – The term includes:
➢ The author or founder of the trust/institution;
➢ A person contributing over Rs. 1 lakh in the previous year or over Rs. 10 lakh in aggregate (termed as “substantial contributor”);
➢ Where the above is a Hindu Undivided Family (HUF), its members;
➢ Any trustee, manager, or their relatives;
➢ Any concern in which the aforementioned persons (excluding substantial contributors) have a substantial interest.
▪ Meaning of Relative – Relatives include spouse, siblings (and their spouses), lineal ascendants or descendants (and their spouses), and certain other close family members.
▪ Meaning of Substantial Interest – A person is deemed to have substantial interest in a concern if, alone or with relatives:
➢ Holds at least 20% of equity share capital (in case of a company), or
➢ Is entitled to at least 20% of profits (in case of other concerns).
▪ Situations Deemed as Benefit to an Interested Person – Income or property of a trust/institution shall be deemed to be applied for the benefit of an interested person in the following cases:
➢ Loan without adequate interest or security
➢ Use of property without adequate rent
➢ Payment of unreasonable salary or allowance
➢ Provision of services without adequate remuneration
➢ Purchase of assets from interested persons for more than adequate consideration
➢ Sale of assets to interested persons for less than adequate consideration
➢ Diversion of income/property exceeding Rs. 1,000 in aggregate
➢ Investment in concerns with substantial interest of the interested person
In the last case, if the aggregate investment does not exceed 5% of the capital of the concern, the exemption is denied only on the income arising from such investment and not the entire income of the trust.
Computation of Income under Section 12AB
Income derived from property held under trust for charitable or religious purposes is exempt if applied in India for such purposes. Expenditure can be revenue or capital, but must align with the trust’s objects. Certain conditions, disallowances, and exceptions apply.
- Manner of Computation
▪ Income is computed on a commercial basis.
▪ Voluntary contributions (excluding corpus donations) are treated as income.
▪ Corpus donations are exempt only if invested in modes specified under Section 11(5).
▪ Anonymous donations are taxed at 30% plus applicable surcharge and cess.
▪ Exempt income under other provisions of Section 10 is not allowed except Sections 10(1), 10(23C), 10(23EA/EC/ED), 10(46/46A/46B), provided registration under Section 12AB is inoperative.
- Income from Business
▪ Income from a business held as property under trust is exempt under Section 11(4).
▪ Business incidental to objectives is exempt under Section 11(4A), provided separate books are maintained and the activity supports charitable objects.
- Application of Income
▪ Includes all expenses incurred for charitable/religious purposes, whether capital or revenue in nature.
▪ Application is allowed only on an actual payment basis.
- Specific Application Scenario
▪ Out of Corpus: Application not allowed unless corpus is restored within 5 years by reinvestment in Section 11(5) modes; subject to other prescribed conditions.
▪ Out of Loans/Borrowings: Application allowed only when repaid out of income within 5 years.
▪ Donations to Other Trusts: Only 85% of donations to other registered trusts are considered applications; corpus donations and donations from accumulated income are excluded.
▪ Capital Gains: Exempt if the entire sale consideration is reinvested in a new capital asset.
▪ Interest-Bearing Loans for Education: Allowed as an application if aligned with the trust’s objectives.
▪ International Welfare: Allowed only if the trust was created before 01-04-1952 or is notified by the CBDT.
- Accumulation of Income
▪ 15% of income can be accumulated without restriction.
▪ Additional accumulation for up to 5 years permitted via Form 10 (filed at least two months prior to the due date under Section 139(1)).
▪ Income deemed applied (due to non-receipt or other reasons) via Form 9A is allowed if filed at least two months prior to the due date.
▪ CBDT Circular No. 6/2023, dated 24-5-2023, clarified that the benefit of deemed application and accumulation shall be available if Form 9A and 10 are submitted on or before the due date for filing the return under Section 139(1).
▪ Unutilised accumulated income beyond 5 years is taxable under Section 115BBI.
- Disallowances and Invalid Applications
▪ Depreciation is not allowed if the cost was already claimed as an application.
▪ 30% disallowance on expenses without TDS deduction [Section 40(a)(ia)].
▪ Cash expenses exceeding Rs. 10,000 are disallowed.
▪ Donations forming a corpus of donee-trusts are not treated as an application.
▪ Application outside India is not allowed unless CBDT grants approval under Section 11(1)(c).
▪ Excess application in prior years cannot be carried forward.
Withdrawal of Exemption [Section 13]
Section 13 prescribes specific circumstances under which the exemption under Sections 11 and 12 shall not be available to a charitable or religious trust. These include violation of public benefit criteria, benefits to interested persons, investment in impermissible modes, and procedural defaults.
- Circumstances Leading to Withdrawal of Exemption
▪ Private Religious Purpose [Section 13(1)(a)] – Exemption is denied if the trust applies income to private religious purposes not for public benefit.
▪ Trust for Particular Religious Community or Caste [Section 13(1)(b)] – Charitable trusts benefiting a specific religious community or caste are not eligible. Exceptions include trusts for Scheduled Castes, Scheduled Tribes, backward classes, women, or children, and trusts created before 01-04-1962.
▪ Benefit to Interested Persons [Section 13(1)(c)] – Income applied for the benefit of specified persons leads to denial of exemption to that extent. Additional consequences include:
➢ Tax under Section 115BBI
➢ Penalty under Section 271AAE
➢ Taxability in the hands of beneficiary under Section 56(2)(x)
▪ Investment in Impermissible Modes [Section 13(1)(d)] – Exemption is denied to the extent funds are invested in non-specified modes. Exceptions include assets held prior to 01-06-1973, bonus shares, business profits with separate books, and assets converted into permissible modes within one year.
▪ Anonymous Donations [Section 13(7)] – Taxable portion of anonymous donations under Section 115BBC is not eligible for exemption. The non-taxable portion must satisfy the 85% application requirement.
▪ Violation of Proviso to Section 2(15) [Section 13(8)] – Where a trust advances an object of general public utility but crosses the 20% threshold of receipts from commercial activities, exemption is denied. Computation of income in such cases allows deduction of revenue expenditure incurred in India, subject to specific exclusions.
▪ Non-filing of Form 10 or Income-tax Return [Section 13(9)] – Failure to submit Form 10 and Income-tax return within the due date under Section 139(1) leads to denial of exemption for accumulated income under Section 11(2). However, no penal consequence arises if both are filed by the due date.
▪ Non-fulfilment of Conditions under Section 12A – Exemption under Sections 11 and 12 is denied if:
➢ Audit report is not obtained
➢ Books are not properly maintained
➢ Return is not filed within the prescribed time
- Computation of Taxable Income upon Withdrawal of Exemption
▪ Permitted deductions – Revenue expenditure incurred in India for trust objects (with exclusions)
▪ Non-permissible deductions:
➢ Capital expenditure
➢ Expenses in default of TDS [Section 40(a)(ia)]
➢ Cash payments [Sections 40A(3)/40A(3A)]
➢ Expenditure incurred outside India
▪ Losses from disallowed expenses are not eligible for set-off under any provision.
Exclusivity of Section 11 and Section 10(23C)
Trusts cannot simultaneously claim exemption under Sections 12AB and 10(23C). They must opt for one at the time of seeking approval.
Anonymous Donations [Section 115BBC]
Anonymous donations are not eligible for exemption under Section 11, Section 12, or Section 10(23C). If the donee does not maintain records identifying the donor, the donation is taxed at 30% (plus applicable surcharge and cess).
- Meaning of Anonymous Donation
An anonymous donation is a voluntary contribution in which the recipient does not maintain records of the donor’s identity, including name, address, and other prescribed particulars.
- Threshold for Taxability
Anonymous donations are taxable only if the total exceeds the higher of:
▪ Rs. 1,00,000; or
▪ 5% of the total donations received.
Tax is levied only on the excess over the higher of these limits.
- Rate of Tax
Tax is levied at 30% (plus surcharge and cess) on the taxable portion of anonymous donations.
- Entities Liable for Tax on Anonymous Donations
The following entities are liable to pay tax under this provision:
▪ Trusts or institutions referred to in Section 11
▪ Educational institutions under Section 10(23C)(iiiad) and (vi) (not substantially financed by the Government)
▪ Medical institutions under Section 10(23C)(iiiae) and (via) (not substantially financed by the Government)
▪ Funds/institutions for charitable purposes notified under Section 10(23C)(iv)
▪ Religious and charitable trusts notified under Section 10(23C)(v)
- Exempt Entities
Anonymous donations received by the following entities are not taxable under this provision:
▪ Trusts or institutions established wholly for religious purposes
▪ Trusts or institutions established wholly for religious and charitable purposes, except where anonymous donations are received with a specific direction for any educational or medical institution run by such trust.
Merger of Trusts [Section 12AC]
Section 12AC provides for the merger of charitable trusts or institutions without incurring tax on accreted income, subject to specified conditions. This provision complements Section 115TD, which exempts accreted tax in case of mergers between registered or approved entities with similar objectives.
Section 12AC applies where:
- Both entities are registered underSection 12AAor Section 12AB, or approved under Section 10(23C)(iv), (v), (vi), or (via);
- Both entities have the same or similar charitable objectives; and
- Other prescribed conditions are fulfilled.
A merger that satisfies these requirements is exempt from accreted tax under Section 115TD.
Tax on Accreted Income [Section 115TD]
Specified trusts or institutions are liable to pay additional income-tax on accreted income when they convert into non-charitable entities, merge with ineligible entities, or fail to transfer assets upon dissolution. This tax, levied under Section 115TD, is in addition to regular income-tax and is charged at the maximum marginal rate.
- Applicability of Accreted Tax
These provisions apply to:
- Institutions approved underSection 10(23C);
- Trusts registered underSection 12Aor 12AB.
- Triggering Events for Accreted Tax
Accreted tax is levied when:
▪ The trust/institution is converted into a non-eligible form;
▪ It merges with an entity not having similar objects or lacking registration/approval;
▪ Upon dissolution, it fails to transfer assets to another registered or approved institution within 12 months.
- Deemed Conversion
Deemed conversion arises when:
▪ Registration or approval is cancelled;
▪ Objects are modified, and the entity fails to obtain fresh registration/approval;
▪ No application is made for re-registration, renewal, or conversion of provisional registration within the prescribed timelines.
- Computation of Accreted Income
Accreted income = Aggregate Fair Market Value (FMV) of assets – Total liabilities
FMV is calculated as per Rule 17CB, ignoring:
▪ Prepaid taxes (net of refunds claimed);
▪ Non-representative assets (e.g., deferred expenditure);
▪ Assets acquired from agricultural income;
▪ Assets acquired before the effective date of registration if no exemption was availed under Sections 11, 12 , or 10(23C);
▪ Assets transferred to another registered institution.
Liabilities exclude capital/reserve funds, contingent liabilities, and tax provisions.
- Tax Rate and Additional Conditions
▪ Tax is levied at the maximum marginal rate.
▪ No deduction or credit is allowed against this tax.
▪ Payable even if the entity has no other taxable income.
- Time Limit for Tax Payment
Tax must be paid within 14 days from:
▪ Expiry of the appeal period or receipt of cancellation order;
▪ End of the previous year in case of modification without re-registration;
▪ End of the previous year, where no application is made for re-registration;
▪ Date of merger or expiry of 12-month period from dissolution.
- Interest on Late Payment [Section 115TE]
Interest at 1% per month or part thereof is levied for delay in payment from the due date till the date of actual payment.
- Assessee in Default [Section 115TF]
The following shall be deemed assessee in default:
▪ The specified trust or institution, including trustees or principal officer;
▪ Any non-charitable entity receiving assets upon dissolution (limited to asset value received).
Tax on Specified Income [Section 115BBI]
Section 115BBI of the Income-tax Act, 1961 prescribes a special tax rate for specified income of certain charitable and religious institutions. It mandates taxation at a flat rate of 30% plus applicable surcharge and cess on such income, irrespective of the general exemption provisions under Sections 10(23C) and 11.
- Applicability ofSection 115BBI
The provision applies to the following entities:
▪ Funds or institutions under Section 10(23C)(iv) and (v);
▪ Universities or educational institutions under Section 10(23C)(vi);
▪ Hospitals or medical institutions under Section 10(23C)(via); and
▪ Trusts or institutions registered under Section 11.
- Specified Income Taxable underSection 115BBI
The following incomes shall be taxed at the special rate:
▪ Income accumulated in excess of the 15% limit, which is not permitted under any specific provisions;
▪ Deemed income under Section 11(1B) not applied within the specified time;
▪ Income applied or ceased to be accumulated for non-charitable/religious purposes;
▪ Income applied for purposes not aligned with approved objects under Section 10(23C);
▪ Income ceasing to remain invested in forms specified under Section 11(5);
▪ Income not utilised within the 5-year accumulation period;
▪ Income credited or paid to another trust/institution registered or approved under Sections 12AA/12AB or 10(23C);
▪ Non-exempt income due to impermissible investments under Section 11(5);
▪ Income used for the benefit of interested persons, thereby losing exemption under Sections 10(23C) or 11/12;
▪ Income applied for charitable purposes outside India, thereby losing the exemption.
- Computation of Specified Income
In computing the specified income:
▪ No deduction shall be allowed for any expenditure, allowance, or loss under any provision of the Act.
▪ This restriction applies only to the computation of specified income; it does not affect other income.
- Tax Rate
▪ Specified income is taxed at 30% plus applicable surcharge and cess.
▪ Other income is taxed at rates applicable to the entity based on its nature and classification.
Approval of a Fund or Institution under Section 80G
Introduction
Section 80G provides a deduction to donors for contributions made to certain approved funds or institutions. The deduction is allowed only if the donee institution is approved by the Principal Commissioner or Commissioner and fulfils specific conditions, including filing statements and issuing donation certificates.
Conditions for Approval under Section 80G
To obtain or maintain approval, a fund or institution must:
- Be established in India for charitable purposes (excluding primarily religious purposes).
- Not be intended for the benefit of any particular religious community or caste, with specified exceptions (e.g., Scheduled Castes, women and children).
- Have income exempt underSections 11,12, 10(23AA), or 10(23C). Business income is permitted if separate accounts are maintained and donations are not used for such business.
- Apply income and assets only for charitable purposes.
- Maintain regular books of account.
- Be constituted or registered under applicable laws (e.g., trust, society,Section 8company, university).
- Be approved by the income tax authority.
- File donation statement inForm 10BDand issue donation certificates in Form 10BE .
Statement of Donation ( Form 10BD )
- Furnished electronically (via DSC or EVC) by 31st May of the following financial year.
- Verified by an authorized person.
- Correction statements may be filed.
- Failure to file attracts a fee underSection 234Gand a penalty under Section 271K.
Certificate of Donation (Form 10BE)
- Issued to each donor by 31st May of the following financial year.
- Specifies donation amount for the year.
- Failure to issue the certificate also attracts a fee underSection 234Gand a penalty under Section 271K.
Application for Approval
- Applications for approval or re-approval must be filed inForm 10Aor Form 10AB , depending on the nature of the applicant and timing.
- Time limits vary, including:
Re-approval of Existing Approval: By 30-06-2024 for institutions already approved as of 01-04-2021 (Circular No. 7/2024).
Renewal of Approval: At least 6 months before expiry for re-approval.
Conversion of Provisional Approval to Regular Approval: Within 6 months of the commencement of activities or 6 months before the expiry of the provisional approval.
Provisional Approval: At least 1 month before the start of the relevant previous year for new applicants seeking provisional approval. For entities that have not commenced their activities.
Direct Regular Approval: At any time after the commencement of activities for direct regular approval, where activities have commenced.
Order for Approval
- Approval is generally granted for 5 years.
- Provisional approvals are valid for 3 years.
- Orders must be passed within prescribed timelines (e.g., 6 months from the end of the relevant quarter in which the application is received). In case of provisional approval, the order shall be passed within 1 month from the end of the month in which the application was received.
Inquiry and Rejection
The Principal Commissioner or Commissioner may call for documents and conduct inquiries. If not satisfied with the genuineness of activities or compliance with conditions, approval may be rejected after providing a reasonable opportunity of being heard.
Form for Approval of Trust or Institution under Section 80G
To claim a deduction under Section 80G, donors must contribute to a fund or institution approved by the Principal Commissioner or Commissioner. Approval is granted through Form 10A (provisional approval) or Form 10AB (conversion, renewal, or direct approval), which must be filed electronically with the prescribed authorities.
- Applicability of Forms
Form 10A is used for:
➢ Re-approval of existing institutions approved before 01-04-2021.
➢ Provisional approval for new institutions (only if activities haven’t commenced).
Form 10AB is used for:
➢ Renewal of approval for institutions under the new regime.
➢ Conversion of provisional approval into regular approval.
➢ Direct approval post commencement of activities.
- Filing Authority and Procedure
The prescribed authority authorised by the CBDT is the Principal Commissioner or Commissioner.
On receipt of Form 10A , approval is granted in Form 10AC with a 16-digit Unique Registration Number (URN).
Incorrect or false information in Form 10A may lead to cancellation of approval after due opportunity of being heard.
On receipt of Form 10AB , approval is granted in Form 10AD with a 16-digit Unique Registration Number (URN).
- Documents to be Furnished
For Form 10A :
➢ Self-certified copy of the instrument or document of creation or establishment.
➢ Self-certified copy of registration certificates with relevant authorities.
➢ Self-certified copy of the order of earlier registration, if any. (for re-approval)
➢ Self-certified copies of annual accounts (up to 3 years immediately preceding the year in which the said application is made), if applicable.
➢ Self-certified affidavit (if no prior approval).
➢ Self-certified copy of the rejection order of the application for grant of registration under Section 80G, if any (for provisional approval)
For Form 10AB : All documents listed above, plus:
➢ Audit reports and accounts of the business undertaking (for trusts with business income).
➢ Self-certified copy of the documents evidencing adoption or modification of the objects.
➢ Notes on activities and objects.
- Conditions for Re-approval Cases-Re-approval orders ( Form 10AC or 10AD ) are passed subject to conditions such as:
No cancellation order under Sections 12AB(4), under the fifteenth proviso to 10(23C), or as per Rule 2C or Rule 17A.
Timely and complete (true and correct) filing of application.
Where the institution is approved and the approval period is due to expire, such institution has applied for approval at least 6 months before the expiry.
- Conditions for provisional approval –Order for Provisional approval ( Form 10AC or 10AD ) are passed subject to conditions such as:
No cancellation order under Sections 12AB(4), under the fifteenth proviso to 10(23C), or as per Rule 2C or Rule 17A.
Timely and complete (true and correct) filing of application.
Institutions with provisional approval must apply for regular approval within 6 months of activity commencement or 6 months before expiry, whichever is earlier.
- Verification and Filing Mode
Applications must be filed electronically with a Digital Signature Certificate (DSC) or through an Electronic Verification Code (EVC), as applicable.
The person authorised under Section 140 of the Income Tax Act must verify the application.