Assessment of Charitable and Religious Trusts in India – A Simple Guide. By CA Mohan Patel

Assessment of Charitable and Religious Trusts in India .      

1. Introduction to Charitable and Religious Trusts

What are Charitable and Religious Trusts?

• These are organizations formed for non-profit purposes such as education, medical relief, relief to the poor, religious activities, and public welfare.
• They can be registered as:
  • Trusts (under the Indian Trust Act, 1882)
  • Societies (under the Societies Registration Act, 1860)
  • Section 8 Companies (under the Companies Act, 2013)

Why Are They Important?

• They support social welfare, education, healthcare, and environmental causes.
• They receive tax exemptions under the Income Tax Act, 1961.
• People who donate to these trusts can also get tax deductions.

2. Governing Authorities for Trusts in India

Various government departments regulate charitable and religious trusts:

• Income Tax Department (for tax exemptions, audits, and compliance)
• Charity Commissioners (for registration in some states)
• Ministry of Corporate Affairs (for Section 8 companies)
• Ministry of Home Affairs (for foreign funding under FCRA)
• NITI Aayog – DARPAN Portal (for government grants)

Each of these agencies maintains detailed records about the trusts and their financial transactions.

3. Registration of Charitable and Religious Trusts

Who Needs to Register?

Any trust or institution seeking tax exemptions must register under the Income Tax Act under:

• Section 12AB (for claiming exemptions under Sections 11 and 12)
• Section 10(23C) (for institutions like hospitals, schools, and universities)
• Section 80G (to enable donors to claim tax deductions)

How to Register?

1. New Registration (Form 10A): For first-time applicants, valid for 3 years (provisional registration).
2. Renewal of Registration (Form 10AB): Required every 5 years for continued exemption.
3. Application Process:
   • Must be filed online.
   • Must provide trust deed, financial statements, and proof of charitable activities.
   • The Income Tax Department will verify documents and grant approval.

Key Conditions for Registration

• Only charitable/religious objectives are allowed (No profit-making intentions).
• No part of income should benefit trustees or members.
• In case of dissolution, assets should be transferred to another charitable entity.
• Separate books of accounts should be maintained if the trust has business activities.

Loss of Registration

• If the trust is found violating rules (e.g., funds misused), its registration can be canceled, and it may be taxed on its accumulated income.

4. Tax Benefits and Exemptions for Trusts

Who Can Claim Tax Exemption?

A trust must:
✔ Be registered under Section 12AB or 10(23C).
✔ Use at least 85% of its income for charitable purposes in India.
✔ File annual tax returns (ITR-7).
✔ Maintain proper books of accounts and audit reports.
✔ Ensure donations are properly accounted for.

Income Eligible for Exemption

• Voluntary Donations: General and corpus donations (given specifically to create permanent funds).
• Foreign Donations: Subject to FCRA compliance.
• Income from Property Held Under Trust: If applied towards charitable purposes.
• Government Grants: If used per grant conditions.
• Incidental Business Income: Allowed if separate books are maintained.

Taxability of Donations

1. Anonymous Donations: Taxed at 30% under Section 115BBC.
2. Foreign Donations: Must comply with the Foreign Contribution Regulation Act (FCRA).
3. Corpus Donations: Not taxable if used only for intended corpus purposes.

Investments and Asset Management

• Trust funds must be invested in government-approved securities under Section 11(5).
• Any violation leads to taxation of the amount as per Section 115BBI.

5. Donations and Section 80G Benefits

What is Section 80G?

• Donations to approved charitable trusts are eligible for tax deductions.
• The trust must be registered under Section 80G.
• Donors can claim 50% or 100% tax deductions depending on the type of donation.

Why Register Under Section 80G?

• Enables donors to claim tax deductions on donations made to the trust.

Helps attract more donations.

Conditions for Section 80G Approval

• The trust must be a non-profit organization.
• Religious trusts can get 80G approval only if they do not spend more than 5% of their income on religious activities.
• Cash donations above ₹2,000 are not eligible for deductions (only digital payments or cheques are allowed).

Withdrawal of 80G Approval

• If a trust fails to follow conditions, the Income Tax Department can cancel its 80G status.

Reporting of Donations

• Trusts must file Form 10BD every year, listing all donations.
• They must also issue Form 10BE to donors.

6. Commercial Activities by Trusts

A trust can engage in business-like activities, but with restrictions:

• General Public Utility (GPU) Clause – If a trust earns from trade or commerce, its revenue from such activities must not exceed 20% of total receipts.
• Incidental Business – If a trust runs a business related to its charitable purpose (like selling handmade goods for a vocational school), it must maintain separate accounts.
• If these rules are violated, the trust loses its tax exemption.

7. Compliance & Audit Requirements
8. Mandatory Bookkeeping & Audit

• Trusts must maintain proper records of income, expenses, and investments.
• Annual audits are required (Form 10B/10BB).
• If audit reports are not filed, exemptions are denied.

2. Filing of Tax Returns (ITR-7)

• Every trust must file ITR-7 on time.
• Late filing results in denial of exemptions.

3. Annual Statement of Donations (Form 10BD)

• Trusts with 80G approval must submit Form 10BD disclosing donor details.
• A donation certificate (Form 10BE) must be issued to donors.

4. Penalties for Non-Compliance

• Failure to file returns or maintain proper records leads to taxability under Section 115BBI.
• If benefits are given to trustees/members, heavy penalties apply.
• Unapproved commercial activities result in cancellation of registration.

8. International Monitoring & Government Scrutiny

Financial Action Task Force (FATF) & Anti-Money Laundering Measures

• The FATF monitors non-profits for potential misuse in money laundering and terrorism financing.
• The Income Tax Department and Financial Intelligence Unit (FIU) track suspicious transactions.

FCRA (Foreign Contribution Regulation Act)

• Trusts receiving foreign funds must comply with FCRA laws.
• Failure to report foreign contributions can result in penalties and cancellation of approval.

CAG (Comptroller and Auditor General) Audit

• The CAG audits trusts receiving government grants.
• It ensures funds are used correctly and trusts are not being misused.

 Recent Changes in Law

• Finance Acts of 2021, 2022, and 2023 have tightened regulations.
• Failure to register or comply with rules can lead to penalties and cancellation of tax benefits.

9. Consequences of Non-Compliance

If a trust violates tax rules, the consequences include:

• Cancellation of Registration – The trust will no longer enjoy tax exemptions.
• Tax on Accumulated Income – If a trust fails to apply 85% of its income, it will be taxed under Section 115BBI.
• Penalties on Trustees – If a trust passes benefits to its trustees or related persons, a penalty is levied under Section 271AAE.
• Audit and Legal Action – Trusts not maintaining proper records may face investigations and legal proceedings.

10. Key Takeaways & Final Checklist for Trusts

✔ Ensure valid registration under Sections 12AB, 10(23C), or 80G.
✔ Use at least 85% of income for charitable purposes annually.
✔ File ITR-7 and audit reports on time.
✔ Maintain clear financial records and books of accounts.
✔ Comply with FCRA if accepting foreign donations.
✔ Ensure no private benefit is derived from trust funds.
✔ Follow FATF and anti-money laundering guidelines.

11. Summary – Key Points for Trusts

✅ Do’s

✔ Register under Sections 12AB, 10(23C), and 80G if seeking tax exemptions.
✔ Apply at least 85% of income towards charitable activities.
✔ Maintain proper books of accounts and file audit reports (Form 10B/10BB).
✔ File ITR-7 and donation statements (Form 10BD/10BE) on time.
✔ Follow FCRA rules for receiving foreign donations.

❌ Don’ts

❌ Do not use funds for personal benefits or non-charitable activities.
❌ Do not exceed 20% of revenue from commercial activities.
❌ Do not delay registration renewal.
❌ Do not fail to report donations properly.

Final Thoughts

If you are running a charitable or religious trust, it is important to stay compliant with tax laws. Proper registration, transparent financial management, and timely reporting will help maintain tax exemptions and avoid penalties.

By following these guidelines, charitable and religious trusts can continue to enjoy tax exemptions, receive donations, and fulfill their social missions effectively. Proper compliance ensures transparency, accountability,