“Unlock the intricacies of trusts with insights into types, creation, tax benefits to donors, and taxation. Understand the roles of authors, trustees, and beneficiaries. Explore the creation process, trust property, and its types—public trusts (charitable and religious) and private trusts (revocable, irrevocable discretionary, and irrevocable non-discretionary). Dive into the benefits of donations to charitable and religious trusts under section 80G of the Income Tax Act, ensuring compliance with forms 10BD and 10BE. Discover the exemptions for charitable or religious trusts, including tax benefits on capital gains and specific conditions. Stay informed on the nuances of trust taxation to navigate legal complexities.”
A Trust is nothing but transfer of PROPERTY by one person, called author of trust, to another person, called Trustee, for the benefit of third party, called Beneficiary.
Property can be anything such as real estate, shares, money or any other valuable assets. Parties involved in Trust
- Author of trust, the one who transfer the property
- Trustee, the one to whom property is transferred by author of trust. Every person capable of holding property can become the trustee but where the trust involves exercise of discretion, he cannot execute it unless he is competent to contract. Hence, in case when trust involves discretion, only a person, who is capable of holding property and competent to contract, can become a Trustee.
- Beneficiary, the one for whose benefit property is transferred by author of trust to trustee. Every person capable of holding property may become a beneficiary.
Creation of Trusts: A trust is created when the author of trust indicated with reasonable certainty by word or act:
- An intention to create trust
- Purpose of trust
- Beneficiary
- Trust property, and
- Transfer the trust property to trustee
Trust Property: The asset transferred by author of trust to trustee for the benefit of beneficiary.
In case when trust property is an immovable property, NO trust is valid in relation to immovable property unless declared by Non-Testamentary Instrument in writing signed by author of trust or trustee and registered. Non-Testamentary Instrument is an instrument that restricts or conceals right of any person to property.
A Trust may be created by:
- Every person competent to contract, and
- With permission to principal Civil Court of Original Jurisdiction, by or on behalf of minor
Types of Trusts
- Public Trust: It is created for a large group or general public. A public trust is divided into two types i.e. Charitable public trust and Religious public trust.
- Private Trust: Unlike Public Trust, it is created for close group and have specific beneficiaries. Private trust are of three types namely revocable trust, irrevocable discretionary trust and irrevocable non-discretionary trust.
PUBLIC TRUSTS
Religious Trust: The term ‘Religious Trust’ is NOT defined in the income tax act. However, a religious trust must promote religious purpose. Religious purpose is also not defined in income tax act; however it includes the advancements, support or propagation of a religion and its tenets. The income of a religion institute is eligible for exemption, but in order to claim such exemption religious trust needs to be registered under section 12AA of income tax act. Exemption under section 11 and 12 of income tax act is available only to public religious trust and NOT to private religious trust.
Charitable Trust: A trust which promotes charitable purpose in India is charitable trust. As per income tax act, charitable purpose includes:
- Medical relief or relief to poor
- Education
- Yoga
- Preservation of environment
- Advancement of any other object of general public utility.
However, any activity in nature of trade, commerce or business or any activity for rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration is not considered to be for charitable purpose, irrespective of nature of use or application, or retention of the income from such activity unless:
a) such activity is carried out for the advancement of any other object of general public utility
b) the aggregate receipt from such activity during the F.Y. does not exceed 20% of total receipts of said trust
In order to claim exemption, charitable trust or institution are eligible for exemption under section 11 and 12 of income tax act but ONLY charitable trust that are registered under section 12AA enjoys the benefits of exemption.
What are the Benefits to those who Donate funds to Charitable trust and Religious trust:
An assesse who donates any sums to charitable or religious trust or institute, is eligible for deduction under section 80G of Income Tax Act up to 50% of such donation subject to qualifying limit.
It means an assesse donating funds to Charitable institutes or Religious trust is eligible for deduction of amount lower of following:
- 50% of such donation OR
- Qualifying limit
Qualifying limit refers to 10% of Adjusted Gross Total Income.
Adjusted Gross Total Income is computed by reducing Gross Total Income by:
- Deduction under chapter VI-A, except under section 80G
- STCG taxable under section 111A
- LTCG taxable under section 112 and 112A
- Any income on which income tax is not Payable
However, deduction under section 80G of income tax act is provided to donor only if a statement of such donation is furnished by DONEE in form no. 10BD and certification of such donation is required to be provided in form no. 10BE. Also both the forms are required to be furnished on or before 31st May, immediately following the financial year in which such donation is received.
Income Tax on Charitable or Religious Trusts or Institutes:
- As per section 11 of income tax act, when income derived from trust property is used by trust in promoting INTERNATIONAL WELFARE in which India is interested AND CBDT either by general or specific notification has directed that such income shall not be included in total income of trust then such income is EXEMPT.
- As per section 11 of income tax act, Capital Gain from asset held under trust is EXEMPT if net consideration is utilised fully for acquiring another capita asset as entire capital gain is deemed to have been applied for charitable or religious purposes.
However, where a part of net consideration is utilised for acquiring new capital asset then the capital gain equal to amount by which the amount so utilised exceeds the cost of old asset is EXEMPT as capital gain to such extent is deemed to have been applied for charitable or religious purposes
- As per section 12 of income tax act, Donations or voluntary contribution, made with specific directions that form part of corpus of trust, is FULLY EXEMPT.
However, voluntary contributions without such specifications form part of INCOME FROM TRUST PROPERTY.
- As per section 11 of income tax act, INCOME FROM TRUST PROPERTY applied for charitable or religious purpose in INDIA is FULLY EXEMPT
But INCOME FROM TRUST PROPERTY accumulated, NOT spent yet, for charitable or religious purposes in India is EXEMPT up to 15% of such income only. It means charitable or religious trust needs to spend 85% of their income for their purposes.
Any amount applied by charitable or religious trust to any other charitable or religious trust registered in section 12AA of income tax act, shall NOT be considered as amount spend on charitable or religious purpose.
When charitable or religious trusts fail to apply 85% of income derived from Trust Property, the income can still be exempt in following cases:
Case1: The income is DEEMED to applied for charitable or religious purpose
When the income applied to charitable or religious purpose in India by the charitable or religious trust is less than 85% of INCOME DERIVED FROM TRUST PROPERTY either due to:
a) whole amount or part of amount is NOT received in the year, OR
b) any other reason
then assesse has the option to:
i) apply such income referred in case of (a), for charitable or religious purpose in India during the previous year in which it is received or during the previous year immediately following the previous year
ii) apply such income referred in case of (b), for charitable or religious purpose in India during the previous year immediately following the previous year in which income is received, such an option can be exercised by assesse in form 9A within the time limit allowed for filing return under section 139(1).
Case2: The income is allowed to be accumulate by trust
When 85% of trust income is not applied or deemed to have been applied for charitable or religious purpose and it is allowed to accumulate, then such income will be EXEMPT only if trust fulfils all of the following conditions:
a) Trust furnishes form no. 10 e. notice of accumulation of income by trust on or before due date for filing the return of income
b) Mention the purpose of accumulation of income
c) Income shall not be accumulated for more than 5 years
d) Money so accumulated or set aside must invest or deposit in following:
i) Investment in Government saving certificate or UTI
ii) Deposit in post office savings bank or schedule bank or co-operative bank
iii) Investment in immovable property
iv) Investment in any security for money created and issued by Central or State Government
v) Company debentures which are fully and unconditionally guaranteed by Central or State Government
vi) Investment in Public Sector Company
vii) Deposit with or investment in bonds of a financial corporation or an Indian public company engage in providing long term finance for India’s industrial development
However, money so accumulated can be taxable in following cases:
a) If income is applied for any purpose other than charitable or religious, then such income is taxable in year of such application
b) When income ceases to be invested as specified, then it is taxable in the year in which it cease to exist
c) When income is NOT utilised for the purpose for which it is accumulated or accumulated for more than 5 years, then income is taxable in 6th year
d) When accumulated income is donated to registered trust under section 12AA or 10(23C) of income tax act, then such income is taxable in the year in which it is donated.
NO EXEMPTION is available to the following Income of Charitable or Religious Trust:
- Entire income from Trust Property is utilised for the benefit of private religious purpose which does not benefit the public
- Entire income of Charitable or Religious Trust is established for the indirect benefit of any particular religious community or caste
- If income(wholly or partly) and property of charitable or religious trust is used for benefit of SPECIFIED PERSON. Specified person are:
a) Author of trust
b) In case the author of trust is HUF, any member of HUF
c) Any person who had made contribution of more than Rs.50,000 in a F.Y.
d) Trustee
e) Any relative of anyone specified above
- Income of trust is not invested as specified
- Value of any medical or educational services made available by any charitable or religious trust running a hospital or medical institution or educational institution to SPECIFIED PERSON. Specified person are:
a) Author of trust
b) In case the author of trust is HUF, any member of HUF
c) Any person who had made contribution of more than Rs.50,000 in a F.Y.
d) Trustee
e) Any relative of anyone specified above
- Any income being profit or gains of business unless business is incidental to the attainment of the objectives of trust and separate books of accounts are maintained in respect of such business.
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DISCLAIMER:- This Blog is for the purposes of information / knowledge and shall not be treated as solicitation in any manner or of for any other purposes whatsoever
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