What ITRs are applicable for Trust and when?
A summary of charitable trust taxation
In this post, We will discuss ITRs that are applicable for Trust and charities; let’s take a close look at each section in detail:
A Brief overview of trust
As per the Supreme Court ‘charity’ means doing things that help others without expecting anything for yourself. The act of charity is giving entirely to those in need, whether cash or goods.
Many groups, such as Non-Governmental Organisations (NGOs) and nonprofit organisations, operate worldwide, recognise the value of collaboration. They establish institutions or trusts to do good and raise money for charity.
These steps are critical to improving the economy and assisting the government in meeting its social welfare goals. The Indian government provides various tax breaks and exemptions to encourage these efforts, and Section 80G is a key component of this support.
Registered Trust- sections and their provisions
Registered trusts in India are taxed under different sections of the Income Tax Act of 1961, depending on the nature and purpose of the Trust’s activities. The following are key sections and their respective provisions:
- Section 11: This section covers charitable trusts. Such trusts are eligible for tax breaks if they give at least 85% of their income to philanthropic activities. Income that is used for charitable purposes is not subject to income taxes.
- Section 12: This section applies to trusts established for religious purposes. Such trusts are eligible for tax breaks if they use their earnings for spiritual purposes.
- Section 10(23C): This section applies to trusts established for educational purposes. Such trusts are eligible for tax breaks if they use their earnings for educational purposes.
Unregistered Trust -sections and their provisions
In India, unregistered trusts are taxed by the Income Tax Act of 1961, which applies to associations of persons (AOPs). Below are some of the relevant sections and their provisions:
- Section 67A: Under this section, the income of an unregistered trust is taxed as if it were the income of an AOP. This means that the Trust’s income is taxed at the highest marginal rate applicable to an AOP, currently 30%.
- Section 161: This section taxes the income of a trust when it becomes an association of persons due to certain events, such as the death of the sole trustee. In such cases, the Trust’s income is taxed along with the AOP’s.
- 3. Section 164: If a trust distributes income to its beneficiaries, it is taxed under this section.
Tax Rate for Trusts
If the trust’s income is not exempt, it will be taxed as an Association of Persons (AoP). There is no tax on income up to Rs. 2.5 lakh. However, AoP tax rates only apply to income that is not protected by the Act’s charitable trust exemption. If a trust violates the registration conditions, its income will be taxed at the highest marginal rate.
The table below summarises trust taxation provisions.
| S. No. | Circumstance | Tax Rate |
| 1 | The trust earns money for which no exemption is available under the Act. | The income is taxed at the following slab rates: Income-Tax:
Surcharge:
Cess: 4% of (Income Tax + Surcharge) |
| 2 | The trust has surrendered its status as a charitable trust because of breaking the restrictions set by the Act. | The trust should pay tax at the maximum marginal rate. The rate for Assessment Year 2020-21 is 42.744%. The rate applies exclusively on the component of revenue that can be linked to the loss of charity status. The remaining amount of the income should be taxed at the AOP rates specified in the preceding item. |
| 3 | The trust has shifted to a non-charitable trust. | The maximum marginal rate of 42.744% should be applied to accrued income. Accreted income is the amount of aggregate fair market value of total assets less entire liabilities. This tax will be in addition to the trust’s usual income tax payments. |
ITR Filing for Trust
Trusts earning over ₹ 2.5 lakhs per year must file annual returns as required by law. However, regardless of their income, the Trusts listed below must file Income Tax returns.
- Research associations.
- News companies
- Associations or institutions
- Securitization Trust
- Investor Protection Fund
- Core Settlement Guarantee Fund
- Institutions Funds
- Universities and educational institutions
- Mutual funds
- Investor funds to protect investors.
- Venture Capital Fund
- Debt funds
- Trade Unions
- Body/Board/Trust/Commission
- Business Trusts
ITR-5/ITR-7 Form
Trusts can file taxes on either the ITR5 or ITR7 forms. If a trust earns more than 2.5 lakhs per year, it must comply with the Income Tax Act and may use ITR5.
If the Trust falls into one of the specific categories listed in Sections 139 (4A, 4B, 4C, 4D, 4E, and 4F), it should file tax returns using ITR7.
Due date for filing tax return
- If the Trust needs to have its books reviewed and audited by a chartered accountant, September 30 is the deadline for filing returns.
- If the Trust is required for file Form 3CEB, i.e. for having certain type of related party transactions, then the due date for ITR filing in November 30.
- The Trust has until July 31 to file its IT returns if a CA audit for its books and accounts is optional.
Exemption to a trust
A charitable and religious trust’s income is tax-exempt under certain conditions. There are several provisions that grant trusts exemptions, such as Sections 10, 11, and so forth. Some of the exemptions allowed for a trust are as follows:
1) Section 11 exempts income derived from property held in Trust solely for charitable or religious purposes in India. However, this exemption is subject to certain conditions.
2) According to Section 12, income in the form of voluntary contributions received by a trust established solely for charitable or religious purposes or by an institution established solely for such purposes is also exempt from taxation (subject to certain conditions).
3) Any voluntary contributions an electoral trust receives are not included in its total income (subject to certain limitations).
4) Income from an educational institute is exempt under Sections 10(23C)(iiiab)/(iiiad)/(vi).
5) The income of a hospital or other institution is exempt if it meets the conditions specified in Sections 10(23C)(iiiab)/(iiiad)/(vi).
We have concluded ITRs that are applicable for Trust. Please share your views and opinions with us in the comment section below.
FAQ
1. Which form is used to apply for registration under the Income Tax Act?
Ans: The NGO or charitable institution should apply for registration using Form No. 10A.
2. Is it necessary for an NGO or charitable institution to register under the Income Tax Act?
Ans: Yes, the charitable institution or NGO must register under the Income Tax Act before claiming a tax exemption.
3. What is the need for a written trust agreement?
Ans: Both the trust author and the trustees must sign the written trust deed.
4. When is a donor eligible to claim an Income Tax Act section 80G deduction?
Ans: Donations made to a registered charity or non-governmental organisation (NGO) are eligible for a deduction under section 80G of the Income Tax Act.
