Capital Gains Tax Rules for Charitable Trusts

1. Prologue

A question often asked is, are public charitable trusts registered under section 12A of the Income Tax Act, 1961 liable to capital gains tax on alienation of property held in trust. The answer is yes. So if a Charitable Trust transfers any shares, mutual funds or land or building or both held by it in trust then it Is  liable to capital gains tax as usual in case of any other assessee.

2. The computation

Computation of capital gains would be done in same manner in which it is done in case of other assessees. The gains will be treated as similarly for other assessees.

3. Options to trust

The trust may treat capital gains as normal income and apply 85% of it in year of accrual or fill form no. 9A/10 as per the case and apply accordingly.

Alternatively the trust may use section 11(1A) route and claim exemption.

4. Why section 11(1A)

Section 11(1A) was inserted by the Finance (No.2) Act, 1971 with retrospective effect from 1-4-1962 the rationale for this insertion was explained by CBDT vide Circular no. 72 dated 06.01.1972  as under:

“ Capital gains derived by charitable and religious trusts

73. Under section 11, income derived from property held under trust for charitable or religious purposes is exempt from income-tax to the extent such income is actually applied to such purposes during the previous year itself or within three months next following. As “income” includes “capital gains”, a charitable or religious trust would forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purposes of the trust during the stipulated period. In some cases, charitable or religious trusts are required to sell, in the interest of the trust, capital assets forming part of the corpus of the trust property solely with a view to acquiring other capital assets to be held as part of the corpus of trust. The requirement that the capital gains arising from such transactions should be utilised for charitable or religious purposes, during the accounting year itself or within three months immediately following, has the unintended effect of progressively reducing the corpus of the trust and the income yielded by it.

74. This difficulty has been accentuated as a result of certain amendments made in the scheme of tax exemption of charitable and religious trusts through the Finance Act, 1970. Under one of these amendments, a charitable or religious trust would forfeit exemption from tax on its income if the trust funds, constituting its corpus or income, are invested in a concern in which the author or founder of the trust or any substantial contributor to it or any relative of such author, founder or contributor is substantially interested. Where the investment of the trust funds in such concern exceeds 5 per cent of the capital of the concern, exemption is forfeited in respect of the whole of the income of the trust, while in a case where the investment does not exceed 5 per cent, the exemption is lost only in respect of the income from such investment, the other income continuing to enjoy tax exemption. In order to enable charitable and religious trusts to change their investments suitably, without forfeiting exemption from tax, a specific provision was also made in the Income-tax Act to the effect that the aforesaid provisions would not apply in a case where the investment of the trust funds in the prohibited concerns does not continue after 31-12-1970. In order to avail of the benefit of this relaxation, many charitable or religious trusts divested themselves of investments in prohibited concerns before 1-1-1971. If the provisions of the law were construed strictly, such trusts would have forfeited exemption from tax in respect of their income by way of capital gains arising from the transfer of such investments unless they applied such incomes to charitable or religious purposes during the relevant accounting year or within three months immediately following.

75. The question of eliminating the disadvantage to charitable or religious trusts in being obliged to spend away the capital gains arising from the transfer of assets constituting the corpus of the trust instead of adding to the corpus, was considered by Government in 1963 and administrative instructions were issued to the effect that where a charitable or religious trust transferred a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilised the capital gains arising from the transaction in acquiring a new capital asset, the amount of capital gains so utilised should be regarded as having been applied to the charitable or religious purposes of the trust. These instructions have recently been reiterated.

76. With a view to placing the aforesaid administrative instructions on a legal footing and removing the disadvantage to charitable and religious trusts for the past as also the future, section 11 has been amended, by section 5 of the Finance (No. 2) Act, 1971 by way of insertion of a new sub-section (1A). Under the new sub-section, it has been provided that in a case where a capital asset being property held under trust for charitable or religious purposes is transferred and the whole or any part of the net consideration for the transfer (i.e.,full value of the consideration as reduced by the expenditure incurred wholly and exclusively in connection with the transfer) is utilised for acquiring another capital asset to be held as part of the corpus of the trust, the capital gain arising from the transfer will be regarded as having been applied to charitable or religious purposes. Where the whole of such net consideration is utilised in acquiring the new capital asset, the entire amount of the capital gain will be regarded as having been applied to charitable or religious purposes, while in a case where only a part of the net consideration is utilised for acquiring the new capital asset, an amount, if any, by which the cost of acquisition of the new asset exceeds the aggregate of the cost of acquisition of the capital asset transferred and the cost of any improvements made to such asset, will be regarded as having been applied to such purposes.

77. In a case where the asset which is transferred formed part of property held under trust in part only for charitable or religious purposes, a proportionate amount of the capital gain will be regarded as having been applied to charitable or religious purposes. Thus, where the whole of the net consideration received as a result of the transfer is utilised in acquiring the new capital asset, the whole of the “appropriate fraction” of the capital gain will be regarded as having been applied to charitable or religious purposes, while in a case where only a part of the net consideration is utilised for acquiring the new capital asset, so much of the “appropriate fraction” of the capital gain as is equal to the amount, if any, by which the “appropriate fraction” of the amount utilised for acquiring the new asset exceeds the “appropriate fraction’ of the cost of the transferred asset will be regarded as having been applied to such purposes. The “appropriate fraction” in this context means the fraction obtained by dividing the amount of the income which, under the terms of the trust, is applicable to charitable or religious purposes, by the whole of the income derived from property held under trust in part only for such purposes.

78. The insertion of new sub-section (1A) in section 11 takes effect retrospectively from 1-4-1962, i.e.,the date of commencement of the Income-tax Act and, therefore, places the concession already allowed under executive orders on a legal footing right from the date from which the requirement of application, by charitable or religious trusts, of at least 75 per cent of their income to charitable or religious purposes during the year of accrual of such income was introduced in the income-tax law.”

5. Option to take benefit of section 11(1A)

(I) Where property held under trust wholly for charitable or religious purposes is transferred

Where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:—

(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain;

(ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset;

(ii) where a capital asset, being property held under trust in part only for such purposes, is transferred

Where a capital asset, being property held under trust in part only for such purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:—

(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain;

(ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset.

(iii) Terminologies defined

(i) “appropriate fraction” means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes;

(ii) “cost of the transferred asset” means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) of section 55;

(iii) “net consideration” means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

6. Determination of cost of acquisition

It is provided that “cost of the transferred asset” means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) of section 55.

Therefore,

(a) Cost of acquisition will be determined in the same manner as it is derived in the case of any other assessee as per provisions of section 48 and 49 and will also include cost of improvement thereof incurred by the trust.Sum total of both cost of acquisition and cost of improvement will become cost of transferred asset.

(b) No indexation will be allowed

(c ) Cost of improvement will be determined as per section 55(1) and thus

(i) where the capital asset became the property of the previous owner or the assessee before the 1st day of April, 2001, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and

(ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, by the previous owner, but does not include any expenditure which is deductible in computing the income chargeable under the head “Interest on securities”, “Income from house property”, “Profits and gains of business or profession”, or “Income from other sources”, and the expression “improvement” shall be construed accordingly.

(d) Cost of acquisition will be determined as per section 55(2) and thus

(i) where the capital asset became the property of the assessee before the 1st day of April, 2001, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 2001, at the option of the assessee ;

(ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April, 2001, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 2001, at the option of the assessee :

It is provided that in case of a capital asset referred to in sub-clauses (i) and (ii), being land or building or both, the fair market value of such asset on the 1st day of April, 2001 for the purposes of the said sub-clauses shall not exceed the stamp duty value, wherever available, of such asset as on the 1st day of April, 2001.

“stamp duty value” means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;

(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head “Capital gains” in respect of that asset under section 46, means the fair market value of the asset on the date of distribution ;

The above provisions can be explained in the form of the following example.

If the entire net consideration is used to acquire new asset then there is no difficulty as nothing will be taxable (Sec.11(1A)(a)(i) of the Act). When cost of acquisition and improvement of the asset transferred is say Rs.10 lakhs, the net consideration is say Rs.20 lakhs and the cost of the new asset is Rs.11 lakhs then Rs.1 lakh will be deemed as income applied for charitable purposes u/s.11(1A) of the Act (Section 11(1A)(a)(ii)). If the cost of acquisition of the new asset is only Rs.10 lakhs or less than the benefit of exemption u/s.11(1A)(a) of the Act cannot be availed of.

The provisions of Sec.11(1A)(a)(ii) of the Act contemplates a computation of capital gain under the normal provisions of the Act. This is clear from the expression used in Sec.11(1A)(a) of the Act which refers to “where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer…”. So also Sec.11(1A)(a) (ii) of the Act which uses the expression “so much of such capital gain…” . The expression capital gain or the mode of computation of capital gain has not been defined for the purpose of Sec.11(1A) of the Act and therefore the normal expression capital gain and the computation of such capital gain as laid down in the provisions of Sec.45 to 55A of the Act will apply. For determining the quantum of capital gain which will be deemed to be application of income for charitable purpose and become eligible to get exemption u/s.11 (1) of the Act, the provisions of Sec.11(1A) of the Act have to be applied.

7. Applicability of section 112A

In case long term capital gain arises from listed shares or listed units of equity oriented mutual funds then provisions of section 112A will apply. And accordingly, the tax payable by an assessee on his total income shall be determined as under if—

(i) the total income includes any income chargeable under the head “Capital gains”;

(ii) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust;

(iii) securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004) has,—

(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.

The tax payable by the assessee on the total income referred to above shall be the aggregate of—

(i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh twenty-five thousand rupees—

(a) on long-term capital gains at the rate of ten per cent for any transfer which takes place before the 23rd day of July, 2024; and

(b) on long-term capital gains, at the rate of twelve and one-half per cent for any transfer which takes place on or after the 23rd day of July, 2024:

It is provided that the limit of one lakh twenty-five thousand rupees shall apply on aggregate of the long-term capital gains under sub-clauses (a) and (b);

(ii) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains referred to above as if the total income so reduced were the total income of the assessee.

8. Applicability of section 111A

Where the total income of an assessee includes any income chargeable under the head “Capital gains”, arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust and—

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and

(b) such transaction is chargeable to securities transaction tax under that Chapter, the tax payable by the assessee on the total income shall be the aggregate of—

(i) the amount of income-tax calculated on such short-term capital gains—

(a) at the rate of fifteen per cent for any transfer which takes place before the 23rd day of July, 2024; and

(b) at the rate of twenty per cent for any transfer which takes place on or after the 23rd day of July, 2024;

(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee.

4. Tax on long term capital gains

(i) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income; and

(ii) the amount of income-tax calculated on such long-term capital gains,—

(A) at the rate of twenty per cent for any transfer which takes place before the 23rd day of July, 2024; and

(B) at the rate of twelve and one-half per cent for any transfer which takes place on or after the 23rd day of July, 2024

Amritsar Bench of ITAT in the case of Akhara Ghamanda Dass Vs. ACIT (2001) 114 Taxman 27 (ASR.)(Mag.) 68 TTJ (Asr.) 244, wherein the Amritsar Bench held that even in the case of Trusts capital gain has to be taxed and calculated in accordance with the provisions of Sec.45 to 55A of the Act and that all exemptions, exceptions, deductions and benefits specified in those provisions will be available even to a charitable trust.

9. Judicial precedents

Mumbai Bench of ITAT in the case of Trustees of Shri Ramanagar Trust Vs. Third ITO 13 ITD 426 (Mum) wherein it was held that advances received by a trust in the period earlier to the previous year in which transfer of a capital asset by a trust takes place, if invested in purchase of capital asset should be considered as application of capital gain for charitable purpose.

The ITAT in the case of Al Ameen Educational Society v. The Director of Income-tax, (E) I.T.A.No.575 (B)/2011 analyzed the provisions as under:

In the light of the legal position as explained above let us see as to whether the Assessee can claim the benefit of provisions of Sec.11(1A)(a) of the Act and to what extent. The provisions applicable in the present case was Sec.11(1A)(a)(ii) of the Act because the entire net consideration was not utilized in acquiring another capital asset to be held under trust wholly for charitable or religious purposes. The net sale consideration received on transfer in the present case was Rs.4,00,00,000/-. The cost of acquisition of the property without the benefit of indexation was Rs.1,33,01,892/-. As we have already held capital gain on transfer of capital asset has to be made in accordance with the provisions of Sec.45 to 55A of the Act. Such computation would be as follows:

CAPITAL GAINS

Sale proceeds Rs.4,00,00,000

Less: Indexed cost of acquisition Rs.2,51,22,642

Long term capital gain Rs.1,48,77,358.33 17.

The Assessee has entered into agreement for sale of the property on 12.7.2001. The amount received by the Assessee towards sale consideration over a period of time and utilization of the same for acquiring new capital asset were as follows:

In the case of Trustees of Shri Ramanagar Trust Vs. Third ITO13 ITD 426 (Mum) it has been held that advances received by a trust in the period earlier to the previous year in which transfer of a capital asset by a trust takes place, if invested in purchase of capital asset in the period earlier to the previous year in which transfer of the capital asset takes place such purchase should also be considered as application of capital gain for charitable purpose. If that decision is applied then the difference between the sum of Rs.2,78,38,080/- which is the investment out of net sale consideration received on transfer of capital asset made by the Assessee and the cost of the transferred asset would be deemed to hhave been applied to charitable or religious purposes. The expression “Cost of the transferred asset” is defined in Expln. (ii) to Sec.11(1A) of the Act, and it lays down that “Cost of the transferred asset” means the aggregate of the cost of acquisition (as ascertained for the purposes of Sec.48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within meaning assigned to that expression in sub-clause (b) of Clause (1) of Section 55. Thus the difference between the capital gain utilized in acquisition of new assets viz., Rs.2,78, 38,080 and the indexed cost of acquisition viz., Rs.2,51,22,641/- viz., Rs.27,15,449/- should be considered as application of capital gain for charitable purpose which would be entitled to exemption income u/s.11(1) of the Act. The remaining sum of Rs.1,21,61,909.33 Ps. (Rs.1,48.77.358.33 Ps. being capital gain as per normal provisions of the Act and Rs.27,15,449 which is eligible for exemption as application of capital gain for charitable purpose u/s.11(1A)(a)(ii) of the Act), should be considered as not applied for charitable purposes and not eligible for deduction u/s.11(1) of the Act.

In the light of the above discussion, we are of the view that the order of the AO was erroneous. The argument of the learned counsel for the Assessee that two views were possible on the interpretation of the provisions of Sec.11(1A) of the Act and that the AO has adopted a possible view and therefore in exercise of powers u/s.263 of the Act, the CIT cannot substitute his views with that of the AO, cannot be accepted. The rationale behind the provisions of Sec.11(1A) of the Act as explained in the CBDT Circular referred to earlier and the provisions themselves are very clear. However, even the CIT, in exercise of his powers u/s.263 of the Act has overlooked the correct interpretation of the provisions of Sec.11(1A)(a)(ii) of the Act and therefore to this extent his order is modified as stated above.

The capital gain to the extent not utilized for acquiring new asset, will be considered as income of the trust and all consequences like accumulation etc., should be allowed. Having held that the order of the O was erroneous let us examine as to whether the same was prejudicial to the interest of revenue.

It is clear from the aforesaid decision of the Hon’ble Calcutta High Court CIT Vs. East India Charitable Trust 206 ITR 152 (Cal). that capital gain is also income of the trust and Sec.11(1A) of the Act is not the only way in which capital gain has to be applied for charitable purposes. It is one of the way of applying capital gain for charitable purpose. If capital gain is applied for charitable purpose of the Assessee not by acquiring a new asset but for other charitable purpose, then there is no reason why it should not be considered as application of income for charitable purpose enabling the Assessee to claim exemption u/s.11(1) of the Act. In the present case there is no question of application for accumulation of income for being spent for charitable purpose in future because such application is already deemed to have been made in the previous year itself.

12. Applicability of section 50C

When income had to be computed under sections 11 to 13, application of section 50C had no relevance. Sri Guru Dattatreya Mattum v. ITO (E) (Visakhapatnam-Trib)

13. Position under Income Tax Act, 2025

Section 341 (9) provides that following income from capital gains shall be deemed as application of income—

(a) the capital gain from transfer of a capital asset, being property held under trust wholly for charitable or religious purposes, where the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held,— (i) if the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain; (ii) if only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset;

(b) the appropriate fraction of the capital gain arising from the transfer of a capital asset, being property held under trust in part for charitable or religious purposes, where the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held,—

(i) if the cost of acquisition of the new capital asset acquired is not less than the net consideration in respect of the capital asset transferred, the whole of appropriate fraction of such capital gain;

(ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset.

Here:

(a) “appropriate fraction” means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purpose;

(b) “cost of transferred asset” means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 72 and 73) of the capital asset which is subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in section 90(1)(b);

(c) “net consideration” means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.