Are you aware that charitable organisations may face repercussions, such as loss or penalty, for any wrongdoing? This could be considered part of the income of trusts designated for ‘Private Religious Purposes,’ which does not ensure advancement for the public, according to Section 13(1)(a).
In a broader context, this applies particularly to the income of trusts established on or after April 1, 1962, for the benefit of religious communities or castes, as outlined in Section 13(1)(b). The concept extends to the income of trusts for the benefit of involved parties under subsection 13(3) [Section 13(1)(c)], and funds not invested by trusts as per Section 11(5) may convey a similar idea. Exceptions to these principles may arise if funds are invested in a manner contrary to the modes specified in Section 11(5) [following Section 13(1)(d)]. Forfeiture of exemption of incomes of charitable institutions does not happen in cases where educational or medical facilities are granted to specified persons [Section 13(6)].
Income Disqualifications for Charitable Institutions under Sections 11 & 12 Exemption
Charitable institutions may encounter income disqualifications for exemption under Sections 11 and 12, particularly when the income is not geared towards public benefit, except in cases of trusts established for private religious purposes. If the criterion for public benefit is fulfilled, Section 13(1)(a) does not apply. However, if the benefits are directed towards the public at large and controlled by a specific group, Section 13(1)(a) becomes irrelevant.
In the context of forfeiture of exemption of incomes of charitable institutions, income generated from a property held under a trust for private religious purposes, without contributing to public benefit, does not meet the eligibility criteria for exemption under Section 11 or 12.
Exemption Ineligibility for Trusts Benefitting Interested Persons under Sub-Section 13(3)
As a part of forfeiture of exemption of incomes of charitable institutions, if a trust is established for the benefit of specific individuals, as outlined in Section 13(3) following Section 13(1)(c), and is either religious or charitable in nature, the total income of such a trust does not qualify for exemption under Section 11 or 12 of the Income Tax Act.
Additionally, charitable institutions formed after March 31, 1962, face disqualification from exemption under Section 11 or 12 if their assets or resources are utilised for the direct or indirect benefit of the trust’s founder and other individuals specified under Section 13(3).
Recognition Criteria for Trusts Established On/After April 1, 1962 – Benefit for Religious or Caste Community
Any trust officially recognised on or after April 1, 1962, for the exclusive benefit of a particular religious community or caste, as per Section 13(1)(b), is eligible for exemption.
However, in terms of forfeiture of exemption of incomes of charitable institutions, trusts established for the benefit of Scheduled Castes, backward classes, Scheduled Tribes, or women and children will not be considered as benefiting a religious community or caste within the context of clause (b) of subsection (1).
Criteria for Investments by Charitable Trusts Beyond Specified Modes in Section 11(5)
The revenue of trusts is not eligible for exclusion according to Section 11 or 12 if resources are utilised or placed in manners divergent from those as per in Section 11(5).
To meet the requirements for exclusion, the philanthropic trust needs to designate a minimum of 85% of its revenue for benevolent or spiritual objectives in the given year. The residual sum must conform to the formats stipulated under Section 11(5). Fulfilling both conditions is essential to prevent the potential loss of exclusion as per Section 11(1)(a).
In the event that any capital or funds are invested or deposited after February 28, 1983, in a manner inconsistent with or in addition to the modes detailed in Section 11(5), the charitable institution reserves the right to decide on the forfeiture of exemption of incomes of charitable institutions.
Exemption Preservation Despite Investments Beyond Section 11(5) Modes: Section 13(1)(D)
Under the specified circumstances, the provisions of Section 13(1)(d) will not be applicable, ensuring the preservation of tax exemption for charitable institutions.
Scenarios when Exemptions Will not be Denied
The exemptions will not be denied in the following scenarios:
1. The claimed exemption by the charitable institution will not be forfeited in relation to any addition to assets, such as portions of a company forming corpus as of June 1, 1973, where the accumulation occurs through the distribution of bonus shares.
2. The claimed exemption by the charitable institution will not be forfeited regarding debentures established by the trust or institution before March 1, 1983. However, if the trust or institution acquires debentures after February 28, 1983, but before July 25, 1991, the exemption under Section 11 will be rejected concerning the investment in such debentures.
3. The claimed exemption by the charitable institution will not be forfeited regarding any funds serving the profits and gains of a trust if it maintains separate books of account for such business.
4. The claimed exemption by the charitable institution will not be forfeited for the acceptance of donations in kind or obtaining any asset not adhering to Section 11(5).
In such cases, the trust or institution is required to place or convert the non-conforming asset into a legitimate investment within one year from the end of the financial year in which such assets are acquired, by March 31, 1993.
Exemption Safeguard for Educational or Medical Expenses under Section 13(6)
In accordance with Sections 12(2) and 13(6) for forfeiture of exemption of incomes of charitable institutions, any revenue or income generated by a charitable trust will not face loss or forfeiture of exemption of incomes of charitable institutions if it is specifically applied to educational or medical expenses for particular individuals.
A crucial addition in Section 13, Subsection (6) for forfeiture of exemption of incomes of charitable institutions, from the assessment year 2002, stipulates that there will be no loss or forfeiture of exemption of incomes of charitable institutions under Section 11 or Section 12 if the charitable institution operates an ‘educational’ establishment or a ‘medical’ establishment/hospital. This exemption applies as long as the trust has provided educational or medical facilities to involved or interested persons.
Updates from Finance Act 2020
Some main points of update as per Finance Act 2020 that affect forfeiture of exemption of incomes of charitable institutions are:
For Individuals:
The Finance Act 2020 introduces a new income tax scheme for individuals and Hindu Undivided Families (HUFs). While there is no change in the existing income tax slab rates, individuals and HUFs have the option to be taxed at a concentrated/reduced rate. This reduced rate is applicable provided they forgo exemptions and deductions that are otherwise permissible under the Income Tax Act.
Exemptions and deductions that individuals and HUFs must forgo include normal deduction, house rent grants, leave travel reduction, interest on loans borrowed for self-occupied house possessions, and deductions under section 80C. This also encompasses Provident Fund/Public Provident Fund contributions, life insurance premiums, contributions to the National Pension Scheme (NPS) by other than employees, medical insurance premiums, interest by banks, and donations to charitable establishments under section 80G.
For Local Companies:
The Taxation Law Amendment Act of 2019 introduces a fresh income tax framework for domestic corporations. Entities selecting the reduced tax rate will face a tax rate of 22%, as opposed to the previous rates ranging between 26% and 29.12%, determined by the company’s total revenue. Additionally, companies opting for the reduced tax rate will not be subject to Minimum Alternate Tax.
In the new structure, the effective tax rate for local corporations will be 25.168%, provided they waive exemptions and deductions allowed by the Income Tax Act. This encompasses deductions under section 80G for contributions and grants made to philanthropic trusts and institutions.
Corporations will have the freedom to choose their preferred tax regime, but once the decision is made, it cannot be reversed in subsequent years.
Final Thoughts
The forfeiture of exemption of incomes of charitable institutions is a critical aspect governed by specific provisions. To ensure tax benefits, charitable trusts must adhere to the prescribed modes of investment, particularly outlined in Section 11(5). However, certain exemptions exist under Section 13(1)(d), safeguarding against forfeiture of exemption of incomes of charitable institutions in specified instances. Notably, contributions towards educational or medical facilities, as well as donations in kind, are protected from exemption loss. The Finance Act 2020 introduced reduced tax rates, emphasising the importance of understanding and complying with evolving regulations for charitable entities seeking to maximise their societal impact while maintaining tax benefits.
