Trust income tax is based on the nature of their income or revenue. A charitable trust is a type of entity established to provide religious or humanitarian facilities to the public. Income from charitable/religious trusts is tax-exempt under section 11 of the Income Act 1961.
What Is Section 11 of Income Tax Act?
Section 11 of the Income Tax Act 1961 provides an exemption for income from property held by charitable trusts/corporations for activities carried out for charitable or religious purposes, subject to certain conditions. A trust or institution registered under Section 12AA of the Income Tax Act 1961, can apply for exemption under this section.
Which Incomes Can Be Claimed as an Exemption?
Income from property owned and used for charitable or religious purposes is exempt under Section 11. Income received in the form of voluntary contributions with the express direction that it becomes part of the trust’s or institution’s corpus.
For this section, charitable or religious purposes are defined under section 2(15) of the Income Tax Act 1961.
Section 2(15) of the Income Tax Act 1961 defines the term “charitable and religious purposes” to include assistance to the poor and disadvantaged, education, protection of monuments, protection of the environment, and promotion of historical and artistic interest, promotion of medical aid, yoga, sports or games, and all other general charitable causes. All of the above activities may be exempt under Section 11 of Income Tax.
What Are the Conditions for Claiming Exemptions?
- Income must be derived from assets wholly or partly held in trust for charitable or religious purposes in India (for partly held property under this Act). The exemption is applicable only if the trust was created before it came into effect).
- The aforementioned income must be used or accumulated for such purposes in India.
- Income accumulated or determined for charitable or religious purposes may not exceed 15% of gross income/deductions for the previous year.
- All contributions referred to in Section 12 of the Income Tax Act are considered part of income when calculating income under this section. Section 12 covers voluntary contributions without specific indications of being part of the Corpus Trust or institution.
- Income used for charitable purposes contributing to the promotion of international welfare is also exempt under the following conditions:
- Trusts established after April 1, 1952: To the extent that this income is used to promote international welfare in India’s interest.
- Trusts established before April 1, 1952: Where the income is used for charitable or religious purposes outside India.
- Proceeds deposited or paid to another trust or institution registered under Section 12AA are contributions expressly designated to be part of the trust or institution’s corpus and may not be used for charitable or religious purposes and shall not be treated as an appropriation of processed income.
- In determining the amount of any claim under this Section: 40(a) and (ia), 40A (3) and (3A) apply in the same manner as they apply to the calculation of captive profit or taxable income based on business or professional income.
What Is the Tax Rate for Trusts in 2022?
The income is taxable using the following slab rate:
- Up to Rs.2.5 lakh rupees- No tax is paid.
- Rs.2.5 lakhs to Rs.5 lakh- 5% of (taxable income less Rs.2.5 lakh)
- Rs.5 lakhs to Rs.10 lakh- Rs.12500 plus 20% of (taxable income less Rs.5 lakh)
- Above Rs.10 lakh- Rs.112500 plus 30% of (taxable income less Rs.10 lakh)
How Is Trust Income Tax Calculated?
If a trust had a capital asset costing Rs.1,00,000 and sold the same for Rs.1,50,000 2,50,000 and then bought a capital asset for Rs.1,70,000, then the working will be as follows:
| Particulars | Amount |
| Sale proceeds of the old asset | 2,50,000 |
| Less: Cost of the old asset | (2,00,000) |
| Capital Gain | 50,000 |
| Cost of new asset | 1,70,000 |
| Cost of the old asset | (2,00,000) |
| Capital Gain Utilised | 30,000 |
| Capital gain taxable | 20,000 |
What Is the Due Date for Filing a Trust Tax Return?
Income tax filing deadlines for trusts are as follows:
- September 30, if the trust is required to audit its accounts under the Income Tax Act or other laws.
- November 30th when trust is required to file Form 3CEB. Form 3CEB is required if the trust has entered into certain types of related party transactions.
- July 31st when the trust is not required to audit its account.
What Are the Disadvantages of Putting Your House in Trust?
If you place only your home in trust, your other assets will continue to be subject to estate administration, whether or not there is a will. Even a modest bank or investment account designated in a valid trust must go through the probate process.
Your estate may also face higher costs as the trust must file tax returns and value the assets after your death, and the cost savings from avoiding the estate may be disabled.
FAQ: Trust Income Tax
1. What type of trust has the best tax benefits?
Charitable Trusts and NGOs enjoy certain tax benefits in the form of income tax exemptions subject to some restrictions.
2. Does a trust have to file a tax return?
All trusts must file their income tax returns electronically.
3. Do trusts pay taxes on capital gains?
Profits or gains arising from the transfer of capital property held in trust are treated as capital gains.
Wrapping Up
The exemptions listed in Section 11 must also comply with the conditions listed in Sections 12, 12A, 12AA, 13, and 60-63. Trust income tax returns must be filed electronically with the digital signature of the chartered accountant responsible for conducting the audit.