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Taxation of Donations Received by Charitable Institutions


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.