Section 11 of the Income Tax Act

Social welfare and progress are cornerstones of development and progress in India. While the Indian government launches various initiatives to achieve this goal, charitable trusts and organisations further this objective at the grassroots level. To make it easier for these trusts to carry out their charitable activities, the IT Act of 1961 , contains several tax-saving provisions. Among these, section 11 of the Income Tax Act is particularly relevant to such trusts.Let us explore the nuances of section 11, which contains the details of charitable trust exemptions.

Section 11 of Income Tax offers exemptions on any income that charitable trusts earn from any property. Exemptions for charitable trusts are eligible if the income concerned is derived from properties that are being used only for charitable or religious purposes.In section 2(15), the Income Tax Act offers more clarity on what activities fall under this category. They include the following:

• Any relief offered to the poor
• Educational activities
• Medical aid and relief
• Preserving the environment
• Preserving monuments, places or objectives of artistic or historic significance
• Yoga
• Furthering any other object or cause for general public use

If a charitable trust earns income from properties being used for any of the above-mentioned purposes, the earnings will not be subject to tax, provided the conditions under section 11 of Income Tax Act are satisfied. More specifically, as per subsection 1 of section 11, the following incomes are exempt for charitable trusts:

• The trust was created on or after April 1, 1952, the property is used for promoting international welfare and the income is used for these charitable purposes outside India.
• The trust was created before April 1, 1952, the property is used for charitable/religious reasons and the income is used for these purposes outside the country.

• Section 11 (1)(a) According to this subsection of section 11 of the Income Tax Act, income from any property held and used entirely for charitable or religious purposes within India is exempt. If any part of such income is saved for future use, it should not be more than 15% of the total income from that property.
• Section 11(1)(b) This subsection of section 11 states that if a trust was set up before this Act, then any income from properties held and used even partially for eligible religious or charitable purposes in India is exempt. Also, any income set aside for future use is eligible for charitable trust exemption, provided it does not exceed 15% of the income from the property.
• Section 11(1)(c) As per this subsection of section 11 of the Income Tax Act, income from any property is eligible for exemption for charitable trust if:
• Section 11(1)(d) This subsection of section 11 states that any income received by the trust as a voluntary contribution, with clear directions that the funds should be a part of the trust’s corpus (only as long as the funds are invested as per the conditions in section 11(5)).

This subsection of sec 11 of the Income Tax Act specifies that a charitable trust must not set aside (or accumulate) more than 15% of the total income received from eligible properties. This means that at least 85% of the income earned must be used for religious and charitable purposes. However, this may not be possible because:

• Income derived: Rs. 1,00,000
• Required spending to claim tax exemption: Rs. 85,000 (i.e. 85% of Rs. 1,00,000)
• Actual amount received and spent: Rs. 60,000
• Shortfall: Rs. 25,000

• Reason 1: If the income was wholly or partly not received during the original year This means the trust has not received all of its income during the original year. So, it will be unable to use 85% of the income due in the same year. However, in this case, if the trust uses the shortfall amount for charitable purposes in the year in which it is received or during the next year, it can still claim the tax exemption in the original year.For instance, consider the following scenario for a trust for the original year FY23:
• Now, say the trust receives this shortfall amount in FY24. If it uses this sum for eligible purposes either in FY24 or FY25, tax exemption for charitable trust is possible in the original year itself (i.e. FY23).
• Reason 2: Any other reason If a trust or institution does not use at least 85% of its income for charitable or religious purposes in India during the original year for any reason other than not receiving the income in time, it can still carry forward the shortfall amount to the next year. If the trust uses the shortfall amount for charitable purposes in the next year, it can still claim the tax exemption for charitable trust under Income Tax Act in the original year.Note: To benefit from this rule, the trust must inform the tax authorities before the tax return filing deadline for that year.

In this subsection of sec 11 of the Income Tax Act, you will find details about the permitted investment modes. If any voluntary contribution has been received or if the trust has decided to set aside or accumulate more than 15% for future use, such amount will also be exempt if the trust:

• Furnishes the required form to the Assessing Officer, explaining the purpose and the period for such accumulation (where the period does not exceed 5 years), and
• Invests or deposits the money accumulated in the manner prescribed under Section 11 (5).

These modes of investment and deposit include the following:

• Specified savings certificates and other securities that the central government has issued under various small savings schemes
• Deposit in a post office savings bank account
• Deposit in a scheduled bank account
• Deposit in a co-operative society account
• Units of the Unit Trust of India (UTI)
• Any security issued by the central or state governments
• Debentures issued by companies, where the interest and the principal are guaranteed by the central or state governments
• Any PSU deposit
• Bonds issued by a company engaged in offering long-term financing for developing industries in India
• Bonds issued by a public company engaged in offering long-term financing for house purchase/construction or urban infrastructure development
• Immovable property (excluding plant and machinery)

Understanding and applying the provisions of section 11 of the Income Tax Act can be both confusing and challenging for charitable trusts. However, if you run a similar trust, it is crucial to leverage the charitable trust exemptions present in section 11, so you can reduce your tax liability and continue to use income from charitable properties to further the cause of social welfare.To better understand and utilise these exemptions under section 11, you can seek professional assistance from a tax expert or financial advisor. They can help you plan trust’s income usage and accumulation in such a way that you make the most of the charitable trust exemptions offered under section 11of the Act.Ready to make the most of your money? Start your tax planning journey now!