Floating a trust may help you earn goodwill & get tax benefits too

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Economic Times

Dhinal Shah
Tax Partner, EY

Philanthropy, these days, seems to be the buzzword. But not many are aware that one can set up his/her own organisation or trust dedicated for undertaking charitable activities such as medical aid to the poor or providing education to those who cannot afford it.

Setting up of a trust

Setting up a trust can be done by executing a trust deed, which should ideally contain details of the trustees, proposed objectives of the trust and the intended beneficiaries, generally the public at large. Such a trust needs to be registered under either the state trust Acts, like the Bombay Trusts Act or as a society under the Societies Registration Act or as a section 25 company under the Companies Act, 1956. The government, to encourage such philanthropic activities, provides various tax rebates.

The Income-Tax Act provides for various tax benefits to trusts engaged in charitable and religious activities, including complete exemption from income-tax for income received by a recognised trust for undertaking charitable activities, as well as tax deduction for the person donating money to a recognised trust.

Registration of trust

After the formation of a charitable trust, first and foremost, it needs to obtain registration from the income tax commissioner. The commissioner may grant registration to the charitable trust if he/she is satisfied with its objects. Accordingly, it is imperative that the objects of the trust fall within the definition of a charitable purpose provided under the Act.

Broadly, charitable activities have been defined to include:

  • Relief to the poor
  • Education
  • Medical relief
  • Preservation of environment, including watersheds
  • Forests and wildlife
  • Preservation of historic and artistic monuments or objects; and
  • Advancement of any other object of general public utility

However, advancement of object of general public utility does not include any activity in the nature of trade, commerce or business where revenues exceed .`10 lakh in a year. Accordingly, any non-commercial activity that benefits the public at large would be covered under the definition of charitable purpose.

I-T benefits for the trust

Section 12 of the Income-Tax Act provides for exemption from tax of all voluntary contributions received by the trust which form part of the corpus of the trust.

Additionally, under section 11 of the Income-Tax Act, income received from property held by the trust is also considered as exempt, where such income is applied or spent by the trust for charitable or religious purpose in India. Such application can be either for revenue or capital expenses.

Exemption is also available if income is spent for charitable purpose outside India for promoting international welfare in which India is interested. To qualify for the exemption, the charitable trust has to apply at least 85% of the total income received from property; the balance can be accumulated to be utilised in future.

If the trust is not able to apply 85% of the property income due to non-receipt of income or for some other reason, then the trust may apply the balance income in the year of receipt or in the immediately succeeding year in which the income was accrued or derived.

Alternatively, such a trust may accumulate or invest in specified securities (viz government savings certificate, post office savings bank account, deposit with scheduled bank or co-operative bank) the income which it is not able to apply for its charitable objects, and specify in writing to the income-tax officer concerned, the purpose for which such an income is being accumulated or invested. The period of such accumulation or investment has been capped at a maximum of five years.

Dos and don’ts

  • The objectives of the trust should fall within the definition of a charitable activity
  • Registration from the incometax commissioner should be obtained
  • The income of the trust should be applied for the objectives of the trust
  • In case the trust is not able to apply the income as specified, accumulate the balance or invest such balance only in specified securities in accordance with Income-Tax Act
  • Maintain books of accounts and get it audited from a chartered accountant
  • File income-tax return of the trust regularly within the specified time limit
  • Anonymous donation in excess of Rs 1 lakh or 5% of total receipts, whichever is higher, should not be accepted
  • Contributions from any foreign source should be accepted only after the government approves them and if they are in compliance with the provisions of the Foreign Contribution Regulation Act
  • The trust should not undertake commercial activity. In case any commercial activity is undertaken in furtherance of the trust's charitable purpose, separate books of accounts should be maintained for it.
  • However, under the proposed Direct Tax Code charitable trust would be called aNGO and it is proposed to tax income of non-profit organisations at 15% on the surplus income.