Amendments in Section 11: Charitable and religious Trusts

Introduction: The landscape of tax regulations pertaining to charitable and religious trusts has recently undergone significant changes, aimed at enhancing transparency and accountability in the application and treatment of trust income. This article delves into the key amendments introduced under section 11 of the Income Tax Act, focusing on the revised timelines and conditions for filing forms, setting apart or accumulating trust income, and the nuances of applying corpus funds. Understanding these changes is crucial for trustees to ensure compliance and optimize the financial management of their trusts.

1. “The phrase “At least two months prior to the due date specified under section 139(1)” has been substituted for “before the expiry of the time allowed under section 139(1) for furnishing the return of income” under Explanation 1 to section 11.

Analysis:

-To treat deemed application of income where the application of income falls short of eighty-five percent of the income derived during that year due to the reason that the whole or any part of the income has not been received during that year, or for any other reason, the time limit to file Form 9A has been reduced from 31st October to 31st August, effective from 01-04-2023.

2. Following proviso added to the explanation 4 to section 11 of the act,

“[Provided further that provisions of the first proviso shall apply only if there was no violation of the conditions specified—

(a) in clause (c) of this sub-section;

(b) in Explanations 2, 3 and 5 of this sub-section;

(c) in the Explanation to this section; and

(d) in clause (c) of sub-section (1) of section 13,

at the time the application was made from the corpus:” 

Analysis:

• Application of the amount from the corpus fund is not allowed as a deduction from the income of the trust in the year of actual application; however, such an amount is eligible for deduction at the time when the trust reinvests/redeposits such an amount into the corpus fund.
• To make such reinvestment/redeposit to the corpus fund eligible for deduction some conditions are introduced from 01-04-2023 such as
• a) Here, section 11(c) refers to when a trust created on or after the 1st day of April, 1952, for a charitable purpose that tends to promote international welfare in which India is interested, to the extent to which such corpus is applied to such purposes outside India, and for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such corpus is applied to such purposes outside India. In short The application should be in India except with the approval of the Board in accordance with the provisions of section 11(1)(c).
• b) Explanation 2 indicates that any amount credited or paid out of corpus to any fund, trust, institution, university, or other educational or medical institution as referred to in sub-clauses of clause (23C) of section 10 or to any other trust or institution registered under section 12AA or 12AB, as the case may be, being a contribution with a specific direction that it shall form part of the corpus, shall not be treated as an application of income for charitable or religious purposes. Therefore, in that case, redeposit/reinvestment is not allowed as a deduction because the earlier corpus was used for making donations to other trusts as a corpus donation.
• Explanation 3, here it means: For the purposes of determining the amount of application from the corpus, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession“.
• Explanation 5, here it means: in the year in which corpus applied for the purpose of objects of trust, calculation of income required to be applied or accumulated shall be made without any set off or deduction or allowance of any excess application of any of the year preceding to that year.
• Further all other explanations are applied to application of such corpus for the purpose of objects of trust.
• Further such application of corpus fund should not be made for persons referred in section 13(3).If such corpus fund is used for the benefit of persons referred in section 13(3) then so much of fund used is not be considered as application at the time of redeposit/reinvestment.
• The amount invested or deposited back shall not be treated as application for charitable or religious purposes under the first proviso unless such reinvestment or redeposit is made within a period of five years from the end of the previous year in which such application was made from the corpus.
• Further nothing contained in this proviso shall apply where application from the corpus is made on or before the 31st day of March, 2021.

3. Following proviso added to the explanation 4 clause (ii) to section 11(1):

“Provided further that provisions of the first proviso shall apply only if there was no violation of the conditions specified—

(a) in clause (c) of this sub-section;

(b) in Explanations 2, 3 and 5 of this sub-section;

(c) in the Explanation to this section; and

(d) in clause (c) of sub-section (1) of section 13,

at the time the application was made from loan or borrowing:” 

Analysis:

Provisions discussed above for use of corpus fund for the charitable or religious purposes are as it is applicable to application of funds from loans and borrowings towards the charitable or religious purposes.

Further nothing contained in the above proviso shall apply where application from any loan or borrowing is made on or before the 31st day of March, 2021.

4. Following clause (iii) shall be inserted after clause (ii) of Explanation 4 to sub-section (1) of section 11 by the Finance Act, 2023, w.e.f. 1-4-2024 :

• “ (iii) any amount credited or paid, other than the amount referred to in Explanation 2, to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, as the case may be, or other trust or institution registered under section 12AB, as the case may be, shall be treated as application for charitable or religious purposes only to the extent of eighty-five per cent of such amount credited or paid.”

Analysis:

• If any donation/contribution made by the trust to any institution/trust/hospital referred in this clause then 85% of such contribution or donation shall be considered as application of income for the charitable or religious purposes.

For instance:

Suppose Trust Jai-Jai is registered under 12AB. Jai-Jai has following position as on 31^st March 2025:

Jai-Jai has not used 85% of its income towards charitable and religious purposes; therefore, Rs.2,00,000 is considered part of the taxable income of Jai-Jai.

In order to fulfill the requirement of using 85% of its income for charitable and religious purposes, the Board of Trustees of Jai-Jai has decided to contribute the remaining amount to another trust named Ladoo Gopal and has paid Rs.2,00,000 to Ladoo Gopal. Despite transferring the entire balance amount to Ladoo Gopal, only 85% of the Rs.2,00,000 will be treated as an application of income. This means that Rs.1,70,000 will be considered as the application from the total Rs.2,00,000, and the remaining Rs.30,000 will be liable to be included in the total income of the trust Jai-Jai. Additionally, in the hands of Ladoo Gopal, the full amount of Rs.2,00,000 will be considered as income.

5. “At least two months prior to ” is substituted for “on or before “ Under the section 11(2)(c):

Analysis:

• If a trust wishes to set apart or accumulate any income received during the previous year, the time limit to file Form 10 has been reduced from 31st October to 31st August every year.

6. “being the last previous year of the period, for which the income is accumulated or set apart but not utilized for the purpose for which it is so accumulated or set apart under clause (c);” has been inserted to substitute “as the case may be, of the previous year immediately following the expiry of the period aforesaid”

Analysis:

• If a trust sets apart or accumulates its income for a certain period (maximum up to five years) and fails to use such set apart or accumulated fund for the purpose for which it was accumulated, then it shall be deemed income of the trust in the year in which the period of accumulation expires. Earlier it was treated deemed income in subsequent year but now treated as income in last year of accumulation itself.

In conclusion, the recent amendments to section 11 of the Income Tax Act highlight the evolving regulatory framework governing charitable and religious trusts. These changes, which include stricter timelines for filing forms and specific conditions for the application of corpus funds, underscore the government’s commitment to ensuring that trust incomes are utilized effectively for their intended purposes. Trustees must familiarize themselves with these updates to navigate the complexities of compliance while maintaining the trust’s fiscal health and fulfilling its philanthropic objectives. By adapting to these new requirements, trusts can continue to contribute positively to charitable and religious pursuits while upholding the highest standards of transparency and accountability.