Section 11 Of Income Tax Act: Exemption For Charitable Trust Under Income Tax Act

In order to support the activities of religious and charitable institutions, the Indian Government provides several tax rebates under Section 11 of the Income-tax Act. However, they are only available for specific types of income, and the entities must fulfil certain conditions in order to claim them. Keep reading to learn more. 

What Is Section 11 Of Income Tax Act?

Section 11 of the Income-tax Act provides an exemption from tax for income derived from property under charitable trusts and institutions. In order to claim them, this income must come from properties that are operating solely for religious or charitable purposes, and the entities must obtain a registration certificate under Section 12A or Section 12AA of the IT Act. The books of accounts must be audited by a Chartered Accountant. The Audit Report & Income Tax returns should be filed within the prescribed due date.

Additionally, there are several other conditions which come into play:

• The purposes for which individuals provide donations to these entities must come under Section 12 of the Act. 
• Considering the mode and manner of fund deposits and investments, trusts must adhere to the conditions present in the Act’s Section 11(5) and Section 13(1). 
• Income should not benefit the settler directly or indirectly. 
• The institutions or trusts must not be established to benefit a particular religious caste or community. 
• The income or property of such institutions should not apply for the direct or indirect benefit of any person defined under Section 13(3). They include the institution’s founder, manager, trustee, author, relative, etc. 

Now, income used by charitable institutions for promoting international welfare is also eligible for exemption under Section 11. However, there are certain conditions in relation to this case as well. These are :

• If the trust was formed before 1^st April 1952, the income utilised for philanthropic or religious purposes outside India will be eligible. 
• If the entity was created on or after 1^st April 1952, income utilised for promoting worldwide welfare activities of which India is a part will be applicable for deductions.    

Exemption Under Section 11 Of Income Tax Act

Here is a list of income which is exempt from tax under Section 11 of the Income-tax Act:

• Income of institutions from property that engages in religious or charitable activities.  
• Up to 15% of the trust’s total revenue earned or received in the previous financial year from such activities. 
• Funds which charitable institutions or trusts receive must be in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. 
• Capital gains by trusts from capital asset transfers up to an extent in which the net consideration amount is utilised to acquire a new capital asset which is held under trust for wholly charitable or religious purposes, the entire amount of capital gains would be deemed to have been applied for charitable or religious purposes.

Section 11(2) of Income Tax Act

Section 11(2) deals with the accumulation of income by charitable institutions and trusts. They can retain up to 15% of their income without utilising it in charitable activities in the year in which it was generated. They are not under obligation to use this amount for charitable purposes in the upcoming years and can retain it as their corpus of capital for the next 5 years. 

Now, institutions must utilise accumulations beyond 15% within the next 5 years. However, this amount will not fall under the institution’s total income in the case of the following:

• Institutions invest the funds in modes specified under Section 11(5).
• In case they submit Form No. 10, which is a notice to the assessing officer informing about income accumulation by a charitable trust at least two months before the due date for filing IT returns. 
• Entities mention the purpose for which the funds are set aside. 
• If the income has been set aside due to a court injunction or order.     

Section 11(4) Of Income Tax Act

Section 11(4) comes into effect when properties under charitable institutions include business undertakings. It states that when assessing the claim that the business's income must not come under the trust’s total income, the Assessing Officer will have the power to assess the business’s income as per the Act’s provisions and determine whether its income exceeds the income as shown in its accounts. 

Additionally, the Officer will assume that the institution will use the excess amount for purposes other than religious or charitable activities.   

Section 11(5) Of Income Tax Act

Section 11(5) of the IT Act deals with the modes of investment prescribed under Section 11 :

• Immovable property investments (not including machinery and plants). 
• Investment in as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;
• Savings certificates and other securities or certificates issued by the Central Government 
• Public sector company’s shares are subject to the conditions specified.
• Deposit with a scheduled bank or a cooperative society engaged in banking (including a cooperative land mortgage bank or a cooperative land development bank).
• Deposits in Post Office Savings Bank Accounts.
• Investments in UTI units.
• Securities issued by financial corporations that take part in long-term industrial financing in India are eligible for availing deductions as per Section 36(1)(viii). 
• Deposits or investments 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.
• Debentures issued for or by companies for which the Central Government guarantees the principal and interest amount.   
• Shares and mutual fund units of National Skill Development Centre. 
• Deposits with Industrial Development Bank of India.
• Other modes of investment as per the Central Government.      

Example Of Section 11 Of Income Tax Act

Let’s take a look at some real-life examples to understand the applicability of Section 11:

• Charitable trusts or individuals running a hospital for humanitarian causes.
• Societies running schools and colleges for propagating education to the masses. 
• Institutions providing financial assistance to colleges, schools or any other educational institutions. 

Now, to gain exemptions under Section 11 of the Income-tax Act, assesses must also follow conditions present in Sections 60-63, 12 (including 12A and 12AA) and 13. Thus, institutions must consult with tax professionals to ensure adherence to them while filing their returns.