Assessment of Trusts: formula sheet

Key formulas

Private trust test

Beneficiaries are specific persons → private trust

Taxed through the trustee as representative assessee. Study the specific-trust rules separately.

Public trust test

Benefit to the public for a charitable or religious purpose → public trust

Exemption is available only if the registration or approval and application conditions are met.

Schedule VII route

Eligible person in column B + conditions in column C → not liable to income-tax on total income for the tax year

Where column C says Nil, the only requirement is that the person falls within column B.

Schedule VII, Sl. No. 19 (small institutions)

Sole educational or medical purpose, not for profit, and aggregate annual receipts ≤ ₹5 crore

The aggregate of annual receipts must not exceed five crore rupees. Anonymous donations are dealt with as for a registered non-profit organisation.

Schedule VII, Sl. No. 17 and 18 (Government-financed)

Wholly or substantially financed by the Government + sole educational or philanthropic purpose, not for profit

Substantial financing is judged by a prescribed percentage of total receipts including donations.

Provisional registration

New trust: provisional registration valid for 3 years

Used where the trust is newly set up and has not yet started activities or has just started.

Application for final registration

Apply at least 6 months before provisional registration expires, or within 6 months of commencing activities, whichever is earlier

Apply to the Principal Commissioner or Commissioner in the prescribed form. Work out both dates and take the earlier one as the last date.

Validity of final registration and renewal

Final registration or renewal: valid for 5 years

Apply for renewal at least 6 months before the registration period expires.

Registration vs approval

Registration → trust's own exemption; Approval → donor's deduction

They are two separate processes with separate applications and orders.

Cancellation

Specified violation + opportunity of being heard → cancellation

Examples: income applied for non-objects, activities not genuine or not matching the objects. The trust can appeal.

85% benchmark

Benchmark application = 85% × regular income of the tax year

Section 341(5). 85% is the benchmark below which the shortfall, or any part of it, may be treated as deemed application at the trust's option. It is not a mandatory minimum.

Donation to another registered non-profit organisation

Allowed application = 85% × sum paid as donation

Section 341(1)(b). A corpus donation to another organisation is not allowed at all (section 341(3)(c)).

Deemed application

Shortfall = (85% × regular income) − application allowed under section 341(1) to (4)

Option exercised on or before the section 263(1) due date. It must be applied in India by the year set in section 341(6).

Capital gain treated as application, whole property held for charity

If net consideration is fully reinvested: whole gain. If partly: amount utilised − cost of transferred asset (if positive)

Section 341(9)(a). Net consideration is sale value less transfer expenses. Cost includes cost of acquisition and improvement.

Capital gain, property held in part for charity

Same tests applied to the appropriate fraction of gain, amount utilised and cost

Section 341(9)(b) and (10)(a). Appropriate fraction is the extent to which the income was applicable to charitable or religious purposes before transfer.

Re-investment of corpus or loan repayment

Counts as application if made within 5 years from the end of the tax year of the original application

Section 341(2). The original application must be after 31 March 2021 and free of violation.

Anonymous donation exclusion

Exempt limit = higher of ₹1,00,000 or 5% of total donations received in the tax year

Section 337, item 1. Anonymous donations above this limit are specified income. Organisations created wholly for religious purposes, or wholly for charitable and religious purposes, are outside this item. The Act's bracketed carve-out deals with anonymous donations made with a specific direction for a university or other educational institution, or a hospital or other medical institution, run by the organisation.

Meaning of representative assessee (trust)

Trustee under written trust or oral trust receiving income for another's benefit = representative assessee

Section 303(1)(d) and (e). A trustee under an oral trust is covered by clause (e).

Deemed written trust

Unwritten trust + signed statement to AO within 3 months of declaration = deemed written trust

Section 303(2). For trusts declared before 1 June 1981, three months from that day. The statement lists purposes, trustees, beneficiaries and trust property.

Deemed assessee

Representative assessee = assessee

Section 303(4).

Liability of representative assessee

Same duties, responsibilities and liabilities as if income were his own beneficial income

Section 304(1). Assessed in own name, but only in representative capacity.

Direct assessment of beneficiary

AO may assess the beneficiary directly or recover tax from the beneficiary

Section 304(3). It applies irrespective of the other provisions of the Chapter.

Partly chargeable trust income

Section 304(4) formula uses A, B and C

A = chargeable part of the income of the trust; B = whole income of the trust; C = income receivable by the beneficiary from the trust. The official text shows the formula itself as an image, so confirm the exact formula from the Act before you use it.

Right of recovery

Trustee may recover tax paid from the principal, or retain it from money in his hands

Section 305(1). Under section 305(2), he may retain a sum equal to his estimated liability.

Cap on retained amount

Amount recoverable at final settlement ≤ amount in AO's certificate

Section 305(3) and (4). The exception is additional assets of the principal in his hands.

Charge on anonymous donation

Specified income = Anonymous donations received − Exempt limit

Taxable in the tax year in which the anonymous donation is received (Section 337, Sl. No. 1).

Exempt limit

Higher of ₹1,00,000 and 5% × Total donations received during the tax year

Total donations means all donations received in the tax year, not only anonymous ones. Apply the limit to anonymous donations only.

Entities outside the rule

Wholly religious, or wholly charitable and religious: not covered

Exception does not apply to a donation directed to an educational or medical institution run by the organisation; such a donation remains covered.

Entities within the rule

Wholly charitable, or mixed with other purposes: covered

A purely charitable trust, or an organisation that is not wholly religious or wholly charitable and religious, is subject to the rule.

Political party: income excluded

Income from house property + Income from other sources + Capital gains + voluntary contributions → not included in total income if conditions (a) to (f) are met

Eligible person: a political party registered under section 29A of the Representation of the People Act, 1951. Business income is not in this list.

Political party: books and records

(a) books of account enabling the Assessing Officer to deduce income; (b) record of name and address of each voluntary contributor above ₹20,000 (other than electoral bond); (c) accounts audited by an accountant

The ₹20,000 limit applies to each contribution. Electoral bond contributions are excluded from condition (b).

Political party: mode of receipt

No donation exceeding ₹2,000 received otherwise than by account payee cheque, account payee bank draft, electronic clearing system through a bank account, other prescribed electronic mode, or electoral bond

Donations up to ₹2,000 in any mode do not breach this condition. Cash above ₹2,000 does.

Political party: reports and return

(e) treasurer or authorised person submits report under section 29C(3) of the Representation of the People Act, 1951; (f) return furnished as per section 263(1)(a)(iii) and 263(2) by the due date in section 263(1)(c)

All six conditions (a) to (f) must be satisfied for Row 1.

Electoral trust: income excluded

Voluntary contributions received → not included if (a) and (b) are met

Eligible person: an electoral trust.

Electoral trust: distribution

Distribution to registered political parties in the tax year ≥ 95% × (aggregate donations received in the year + surplus brought forward from earlier tax years)

The parties must be registered under section 29A of the Representation of the People Act, 1951. The second condition is that the trust functions as per the Central Government's rules.

Consequence of default

Condition not satisfied in a tax year → that income is charged to tax for that year (section 12(2))

Applies to the income for which the condition failed, in that tax year.

Quick revision

• Section 12 and Schedule VIII exclude specified income of political parties and electoral trusts only if the conditions are fulfilled.
• If Schedule VIII conditions fail in a tax year, that income is charged to tax for that tax year.
• A political party must be registered under section 29A of the Representation of the People Act, 1951.
• A political party must keep a record of each voluntary contribution above ₹20,000 (other than by electoral bond), with the donor's name and address.
• A political party may not receive a donation above ₹2,000 except by account payee cheque or draft, electronic clearing or other prescribed electronic mode, or electoral bond.
• A political party's accounts must be audited, and it must furnish its return of income on or before the due date.
• An electoral trust must distribute 95% of the aggregate donations received in the tax year, along with any surplus brought forward, to registered political parties.
• Section 136 allows an Indian company a deduction for contributions to a political party or electoral trust, but not in cash.
• Section 137 allows other assessees the same kind of non-cash deduction, but not local authorities or artificial juridical persons wholly or partly funded by the Government.
• Section 337 lists specified income of a registered non-profit organisation, each taxed in a stated tax year.
• Anonymous donations are excluded from Section 337 up to ₹1,00,000 or 5% of total donations, whichever is higher, and religious entities are carved out as the section describes.
• Always use Income-tax Act, 2025 terms such as tax year and registered non-profit organisation.

Common mistakes

• Treating every trust with a charitable-sounding name as exempt. Fix: Test the actual objects, the application of income and the registration or approval status.
• Confusing a public trust with a trust that has many beneficiaries. Fix: A large family or defined group is still private. The test is whether the benefit is open to the public or a section of it for a public purpose.
• Treating registration and approval as the same thing. Fix: Registration gives the trust its own exemption. Approval allows the donor a deduction. Write the two separately.
• Saying provisional registration lasts five years. Fix: Remember 3 for provisional, 5 for final or renewal.
• Counting a donation to another registered organisation at 100%. Fix: Take 85% of the sum paid under section 341(1)(b). Corpus donations to other organisations get nothing under section 341(3)(c).
• Including corpus donations received in regular income when testing the 85%. Fix: Corpus donations received under section 339 are excluded from regular income by section 338(b). Remove them before taking 85%.
• Treating the trustee's assessment as a personal assessment on his own income. Fix: Remember section 304(1)(a): it is deemed made on him in his representative capacity only.
• Saying the Assessing Officer can only recover tax from the trustee. Fix: State that the AO may directly assess the beneficiary or recover tax from that person.
• Taking 5% of anonymous donations instead of total donations. Fix: The 5% is on total donations received during the tax year. Only the comparison is made against anonymous donations.
• Deducting both ₹1,00,000 and 5%. Fix: The limit is whichever is higher. Pick one figure and deduct it once.

Exam tips

• Begin every answer with a one-line classification: private, public charitable, public religious or mixed.
• In MCQs, watch for the ₹5 crore receipts limit and the words wholly or substantially financed by the Government.
• Read column C of Schedule VII entries in the question. Nil means no further condition.
• Cite the Income-tax Act, 2025 and tax year. Give a section number only if you are certain.
• In case scenarios, list the facts that help and the facts that hurt the exemption, then conclude.
• Write the time limits (3 years, 5 years, 6 months) as a short list, then apply them to the dates in the question.
• Always separate registration (trust's exemption) from approval (donor's deduction).
• In cancellation questions, name the violation, then the hearing, the order and the appeal.