The Income Tax Act, 1961 provides certain tax benefits to a trust that is set up for religious or charitable purposes. To guarantee compliance and maximise benefits, trustees must be knowledgeable of the subtleties of taxability and filing procedures.
Charitable and religious trusts are provided substantial relief under Section 11 of the Income Tax Act, exempting them from paying taxes on income derived from their properties. This exemption facilitates trusts to fulfil their religious or charitable objectives and utilise their income for the benefit of the society. However, these benefits are only available to particular types of income, and institutions must satisfy certain conditions to claim them as well.
Eligibility for Income Tax Exemption
A charitable trust is required to meet certain requirements in order to be eligible for income tax exemption:
The Supreme Court, in the case of Ahmedabad Urban Development Authority, vehemently stated that the institutions claiming the charitable exemption cannot be engaged in trade, commerce, or business activities used for general public utility purposes.
Taxability of Charitable Trusts
Income of the trust will be taxed similar to that of an Association of Persons ( AOP ) if it is not exempt from tax. Taxes are not levied on income up to Rs. 2.5 lakh. But only income that is not governed by the Act for charitable trusts are subject to the AOP tax rates.
Income may be subject to Maximum Marginal Rate ( MMR ) taxation and exemption forfeiture for violating pre-requisites for registration.
The following slab-rate applies while taxing the income:
Income Tax
Surcharge
Cess
Filing of Income Tax Return
If a trust has gross total income over the basic exemption limit, they need to file income tax returns on form ITR-5. Some trusts have to file the income tax return regardless of their total revenue. Every year, the annual return of income (ITR-7 Form) shall be filed. Form 10B must be provided by a charitable or religious trust or organisation that has submitted an application for registration by filing Form 10A, or that has been registered under Section 12A of the Income Tax Act.
Form ITR-7
Firms, Companies, Local Authorities, Association of Persons (AOP), and Artificial Judicial Persons that claim exemption under any of the following categories may file an Income Tax Return through Form ITR-7:
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