Income Tax Aspects of Trusts in India

1. Income Tax Aspects of Trusts

• Registration Under the Income Tax Act: Trusts must register under:
  • Section 12AB: Enables tax exemption on income used for charitable purposes.
    Example: A trust receiving ₹10 lakh as donations applies ₹8.5 lakh for education-related expenses. The trust gets an exemption on this applied income.
  • Section 80G: Allows donors to claim tax deductions for their contributions.
    Example: An individual donating ₹50,000 to a trust registered under Section 80G can claim a deduction of ₹25,000 (50%) from taxable income.
  • Section 10(23C): Provides exemption to specific institutions such as hospitals and educational institutions if annual receipts are below ₹5 crore.
• Exemption Provisions:
  • Section 11 and 12: Income applied for charitable or religious purposes is tax-exempt.
    Example: A trust spends ₹1 crore on healthcare projects out of its ₹1.2 crore income. The spent amount is tax-exempt, while the unspent ₹20 lakh must be either accumulated by filing Form 10 or taxed.
  • Section 10(23C): Educational institutions below ₹5 crore in receipts enjoy tax exemption on income if used for educational purposes.
• Taxability of Income:
  • Voluntary Contributions: Fully tax-exempt if used for the trust's objects.
  • Corpus Donations: Not taxable, provided they are earmarked for specific purposes.
    Example: A ₹2 lakh donation for building a school remains tax-free as it forms part of the corpus.
  • Unspent Income: If not accumulated or applied, it becomes taxable. Filing Form 10 ensures unspent income is retained tax-free for future use.
• Tax on Non-Charitable Activities: Income from trade or business is taxable unless:
  • The business activity is incidental to the trust's objectives.
  • Separate books of accounts are maintained for such income.
    Example: A trust running a bookstore generates ₹10 lakh in revenue. If profits are reinvested into educational projects and separate accounts are maintained, the income may qualify as exempt.

Filing of Income Tax Returns

Trusts are required to file Form ITR-7 along with specific forms depending on their registration and exemption claims. Below is a table that outlines the differences and requirements:

Aspect	Details	Example
Form to be Filed	ITR-7	A charitable trust registered under Section 12AB files ITR-7 to declare income and claim exemptions.
Supporting Forms	Form 10AC: Provisional registration approval. Form 10B: Audit report under Section 12AB. Form 10BB: Audit report for Section 10(23C) institutions.	A hospital claiming exemption under Section 10(23C) submits Form 10BB along with ITR-7.
Due Date	31st October (if audit required) or 31st July (if no audit required)	A trust with gross receipts of ₹3 lakh submits ITR-7 by 31st October due to mandatory audit.
Penalty for Late Filing	₹1,000 for income below ₹5 lakh. ₹5,000 for income above ₹5 lakh.	A trust with taxable income of ₹6 lakh files late and incurs a penalty of ₹5,000.
Audit Requirements	Mandatory if gross receipts exceed ₹2.5 lakh in a financial year.	A trust earning ₹10 lakh undergoes an audit before filing ITR-7.

Key Differences between 10AC 10B and 10BB

Form	Purpose	Key Requirements	Example
Form 10AC	Issued as proof of provisional registration for trusts under Section 12AB.	Submitted when applying for new trust registration. Valid for 3 years from the date of issuance.	A newly established trust applies for registration under Section 12AB. Once approved, the trust receives Form 10AC, allowing it to claim exemptions.
Form 10B	Audit report for trusts registered under Section 12AB.	Mandatory for trusts with gross receipts exceeding ₹2.5 lakh. Certifies that income has been applied for charitable purposes.	A trust earns ₹5 lakh in a financial year. It hires a Chartered Accountant to prepare Form 10B and submit it with ITR-7.
Form 10BB	Audit report for institutions claiming exemptions under Section 10(23C).	Applies to hospitals, universities, and other institutions eligible under Section 10(23C). Confirms compliance with the conditions of the exemption.	A hospital with annual receipts of ₹4 crore submits Form 10BB to certify that its income has been used for healthcare services, ensuring tax exemption.
Key Differences	Form 10AC: Acts as provisional registration for new trusts under Section 12AB, valid for 3 years. Form 10B: Audit report required for trusts already registered under Section 12AB to certify that income has been applied for charitable purposes. Form 10BB: Audit report for institutions like hospitals and educational institutions claiming exemptions under Section 10(23C).

2. Books of Accounts to Be Maintained

• Cash book, ledger, journals, and receipts/payment accounts.
• Maintain separate books for business income.
• Retain records for 6 years from the relevant assessment year.

3.Role of a Chartered Accountant

Advising on Trust Registration

Chartered Accountants guide trusts in obtaining registration under Sections 12AB, 80G, and 10(23C). They assist in preparing and submitting forms such as Form 10A (application for registration).

Audit and Certification

Conducts audits and issues reports like Form 10B (for Section 12AB trusts) and Form 10BB (for Section 10(23C) institutions). They certify that the trust’s income has been applied according to its objectives.

Preparation and Filing of Returns

Ensures accurate filing of ITR-7 and submission of supporting forms like Form 10AC, 10B, and 10BB.

Ensuring Compliance with Section 11 and 12

Monitors that at least 85% of the trust's income is applied for charitable purposes and ensures proper filing of Form 10 for income accumulation if required.

Advisory on Investments

Advises on compliance with investment conditions under Section 11(5), such as deposits in scheduled banks, government bonds, etc.

Managing Tax Disputes

Represents the trust before appellate authorities in case of disputes and assists in responding to notices or demands from the Income Tax Department.

Advisory on GST and FCRA Compliance

Guides trusts on GST registration and compliance. For foreign donations, ensures compliance with Foreign Contribution Regulation Act (FCRA) reporting requirements.

4.Best Practices for Trusts

Maintain Transparency

Ensure all financial transactions are well-documented and accessible for audit and compliance purposes.

File Returns on Time

File all required returns such as ITR-7, along with necessary forms like Form 10B or Form 10BB, within due dates to avoid penalties.

Segregate Donations

Clearly distinguish between corpus donations (for specific purposes) and general donations to avoid misclassification.

Comply with Investment Rules

Adhere to Section 11(5) guidelines for investments, such as deposits in scheduled banks or government securities.

Engage Qualified Professionals

Hire experienced Chartered Accountants for registration, auditing, compliance, and financial advisory services.

Periodic Reviews

Regularly review compliance status and financial records to ensure adherence to tax laws and avoid legal issues.

Frequently Asked Questions (FAQ)

What is the importance of Section 12AB registration?

Section 12AB registration provides tax exemption on income applied for charitable purposes.

What is the role of a Chartered Accountant in trust compliance?

Chartered Accountants guide trusts on registration, compliance, audit, and dispute resolution.

What are corpus donations?

Corpus donations are contributions made for specific purposes, and they are tax-exempt.