Taxation of Donations Received by Charitable Institutions

This article provides a guide to Section 164(2). The section deals with taxability of income in relation to charitable trusts. The Income Tax Act groups the income of a charitable trust under one of the following heads of income:

Income which the trust derives from a property held under trust for charitable or religious purposes.
Income derived from voluntary contribution with or without specific direction that it shall form part of the corpus of the trust.
Income from an incidental person.
Capital Gains.
Anonymous donations.

Income from Property Held under Charitable Trust

The following types of income from property held under a

charitable trust would be exempt from income tax:

An exemption is available for 15% of gross receipts from the property which the trust maintains for charitable purposes
Purchase of capital asset, repayment of a loan which the assessee has taken for the purchase of a capital asset and revenue expenditure, or donation to trust registered under Section 12AA or Section 10(23C), would be exempted.
Income deemed to be applied for charitable purposes in India, in the year of receipt or in the immediately succeeding year is exempt.

Voluntary Contribution

Charitable trusts or institutions may obtain voluntary contributions as donations from the public. When the public remit funds to the trust, the funds shall be considered as a part of the income of the trust/institution. The funds are classified into two types:

Donations received with a specific direction that they shall form part of the corpus find would be exempt from taxation.
The income of the trust includes donations which the public give without any specific instructions.

Capital Gains

Income derived from any transfer of capital assets shall be chargeable to tax under the head capital gains.

Anonymous Donations

Anonymous donations are donations which taxpayers make to a place or person where proper records are not maintained. Exemptions are allowed up to 5% of the total donations or Rs.1,00,000, whichever is higher. However, donations offered to a trust which is entirely religious in nature will be provided with a complete exemption. If the donation is received for educational purposes, and the Trust operates the same, such donations would be taxable.

Maximum Marginal Rate

If a whole or part of the income is not subject to an exemption under Section 11 or 12, the provision of charging tax at the maximum marginal rate is applicable on any of the scenarios mentioned in the following items:

Any part of the income of the charitable trust created or established after 1-4-1962 enures directly or indirectly for the benefit of any person referred to in Section 13(3).
Any part of such income or any property of the trust, which was used or applied in the previous year for any person referred to in Section 13(3).
If funds of the trust are not invested in the mode specified under Section 11(5).

Eligibility for Exemption

A charitable trust or institution pursuing the advancement of object of general public utility may be a charitable trust in a year and not a charitable one in another year. The determining factor would be the commercial receipts, where the aggregate of the same may or may not exceed 20%. If the commercial receipts of an institution/trust exceed 20%, then such institution/trust would be void of claiming the exemption for the previous year.

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Frequently Asked Questions

Common questions about Taxation of Charitable Donations in India: Legal Insights.

Income from property held under a charitable trust, voluntary contributions without specific directions to form part of the corpus, and income applied for charitable purposes in India within the prescribed timeframe are generally exempt from income tax. However, certain conditions and limits apply to avail these exemptions.

Voluntary contributions or donations received by charitable trusts are considered part of their income. Donations received with a specific direction to form part of the corpus are exempt from tax. Donations received without any such direction are included in the trust's taxable income.

Yes, income derived from the transfer of capital assets is chargeable to tax under the head 'capital gains' for charitable trusts.

Anonymous donations received by charitable trusts are exempt from tax up to 5% of the total donations or Rs. 1,00,000, whichever is higher. However, if the trust is entirely religious in nature, anonymous donations are fully exempt.

The income of a charitable trust is taxed at the maximum marginal rate if any part of its income or property is used for the benefit of specific persons (as defined in Section 13(3)), or if the trust's funds are not invested in the prescribed modes.

Yes, a charitable trust or institution may be eligible for tax exemption in one year but not in another, depending on its commercial receipts. If the aggregate of its commercial receipts exceeds 20% of its total receipts, it may lose its tax exemption status for that year.

Yes, for income to be exempt, a charitable trust must apply or accumulate its income for charitable purposes in India within the prescribed timeframe (either in the year of receipt or the immediately succeeding year).

Income derived from incidental activities by a charitable trust is included in its taxable income. However, if such activities are undertaken in the course of carrying out the trust's primary charitable objectives, the income may be eligible for exemption.

Yes, there are special provisions for trusts established entirely for religious purposes. For instance, anonymous donations received by such trusts are fully exempt from tax, and income derived from property held under trust for religious purposes may also be eligible for exemption.

The date of establishment of a charitable trust is significant for determining the applicability of certain provisions related to taxation of its income. For instance, the provision of charging tax at the maximum marginal rate applies to trusts created or established after April 1, 1962, under specific circumstances.