Direct Tax Laws & International Taxation · Assessment of Various Entities

Assessment of Trusts, Institutions and Funds (CA Final DT)

Updated 5 October 2026 · Fact-checked

A charitable or religious trust is exempt on income applied for its objects, if it holds valid registration or approval. You must apply at least 85% of income in India during the tax year, or accumulate the shortfall by notice for up to five years. To solve, check registration, compute income, test application, then tax the shortfall and violations.

Understand Assessment of Trusts, Institutions and Funds

A trust or institution is set up for a charitable or religious purpose, not for profit. The Income-tax Act, 2025 gives it relief, but only if it meets conditions. The relief is not a blanket exemption. It is an exemption of income that is applied to the objects of the trust.

The first gate is registration or approval. Without it, the trust is taxed like any other person. A new trust first gets provisional registration, valid for three years. After that, it must get regular registration, valid for five years, and renew it before expiry. Confirm these periods and the application deadlines in the Income-tax Act, 2025 before you rely on them. Apply well before the deadline, because the application window is fixed by law.

The second gate is application of income. Income here is computed on a commercial basis, before any exemption. The trust must apply at least 85% of it for its objects in India during the tax year. The remaining 15% is not an extra exemption. It is simply the part the trust may leave unapplied without giving notice. If the trust applies less than 85%, it can accumulate the shortfall by giving notice. It must invest the accumulated amount in prescribed modes and use it within five years. Income that is neither applied nor properly accumulated becomes taxable.

Three more points decide most answers. First, voluntary contributions made with a specific direction that they form part of corpus are not income. Second, a trust for advancing a general public utility object loses charitable status if it carries on trade, commerce or business for a fee, unless that activity is incidental to its object and the receipts stay within 20% of total receipts. Third, violations such as investing in non-permitted modes or misusing funds lead to tax at the specified rate on the affected income. Anonymous donations are also taxed at a specified rate, and the Act limits the amount excluded from that tax for certain trusts, including trusts wholly for religious purposes. Do not rely on a remembered percentage. Check the exact rate and exclusion wording in the Income-tax Act, 2025.

So the logic is: registered, then income computed, then 85% applied in India, then tax only the leftover and the violations.

Key rules to remember

Minimum application: Minimum application = 85% × income of the tax year (before application); Income is computed commercially, without claiming the exemption. Corpus donations received with specific direction are excluded from this income.
Free accumulation: Amount that can be left unapplied without notice = 15% × income; Applying 85% means the other 15% can be left unapplied without notice or special investment. Only unapplied income above this 15% is taxable, unless accumulated by notice.
Shortfall in application: Shortfall = 85% × income − amount treated as applied; If the shortfall is positive, it is taxable unless the trust accumulates it by notice and invests it in permitted modes. Equivalent check: taxable = unapplied income − 15% × income.
Accumulation by notice: Accumulation period ≤ 5 years, in permitted modes, with notice to the Assessing Officer; Amounts not used within the period, or diverted, become taxable. Check the exact notice timing in your study material.
Donation to another trust: Treated as application = 85% × amount donated; This applies only where the donee is a registered or approved trust or institution. It is not full application for the donor. A donation to an unregistered donee is not application.
Registration validity: Provisional = 3 years; Regular = 5 years; Apply for the next registration or renewal well before expiry. Verify the periods and time limits in the Income-tax Act, 2025.
Commercial receipts limit (general public utility): Business receipts incidental to object ≤ 20% of total receipts; Above 20%, or if the business is not incidental, the object is not treated as charitable.
Application outside India: Allowed only for objects promoting international welfare in which India is interested, with Board approval; Other foreign spending is not application.

How to solve Assessment of Trusts, Institutions and Funds questions

Use the same gate-by-gate method for every trust question. It keeps your answer in provision, facts, conclusion form.

1Check registration or approval. Note the type (provisional or regular), the validity and whether the tax year falls within it. If not registered, tax the trust as a normal person and stop.
2Check the object. Is it charitable (relief of the poor, education, medical relief, environment, monuments, general public utility) or religious? Test the 20% commercial receipts rule for general public utility trusts.
3Compute income on a commercial basis. Include all receipts, exclude corpus donations with specific direction, and deduct normal expenses of earning the income. Do not deduct the amounts applied.
4List the applications. Include revenue spending in India, capital expenditure on objects (once only, with no later depreciation claim), and 85% of donations to other registered or approved trusts or institutions. Exclude spending outside India and out of borrowed funds not yet repaid.
5Compare with 85% of income. Find the shortfall. Use the 15% free accumulation and any brought-forward deficit as the rules permit.
6Decide on accumulation. If the trust gave notice and invested in permitted modes, the shortfall is not taxed now. If not, it is taxable.
7Add taxable amounts from violations, anonymous donations and non-incidental business income, each at its own rate.
8Write the conclusion with the total taxable income and the reason for each addition.

Quickest way: The four-line trust check

When to use it: Use it for MCQs and for the opening of a written answer, when you have under five minutes.

Line 1: Registered? If no, fully taxable.
Line 2: Income (commercial, excluding corpus) × 85% = target application.
Line 3: Genuine application in India (donations to other registered or approved trusts at 85%) versus the target. The gap is the shortfall.
Line 4: Shortfall is taxable unless accumulated by notice and invested in permitted modes. Then add violations and anonymous donations separately.

Common mistakes in Assessment of Trusts, Institutions and Funds

Treating 85% as a share of receipts instead of income.
Students read the figure of gross receipts in the question and apply 85% directly.
Fix: Deduct the expenses of earning the income first, exclude corpus donations, and only then take 85%.
Counting a donation to another trust as full application.
The money has left the donor trust, so it looks spent on charity.
Fix: Check that the donee is a registered or approved trust or institution. Then count only 85% of the amount donated as application.
Including corpus donations in income.
Students do not read the phrase 'with specific direction that it forms part of corpus'.
Fix: Underline that phrase in the case. If present, the donation is not income, so it is outside the base for the 85% test. If the trust later spends it on its objects, that is application out of corpus and does not count towards the 85% of income.
Claiming depreciation on an asset whose cost was already treated as application.
Depreciation looks like a normal business expense.
Fix: Remember that claiming both gives a double benefit. Treat the cost as application once and allow no depreciation on that asset later.
Saying the trust is exempt because it has charitable objects, ignoring registration.
Object tests feel like the main theme, so validity of registration is skipped.
Fix: Always start with registration and its validity period. Say it in your first line.
Treating any business income of a trust as exempt.
Students assume trusts may run businesses freely.
Fix: Check that the business is incidental to the object, that separate books exist, and that the 20% limit is met for general public utility objects. Otherwise it is taxable.

Worked examples

Example 1

Case: Shree Vidya Trust is a registered educational trust. For the tax year, its income computed on a commercial basis, before any application, is ₹40,00,000. It applied ₹32,00,000 on its objects in India. It gave no notice for accumulation. Find the taxable income.

Show the solution

The trust is registered, so the exemption can apply if conditions are met.
Required application = 85% × ₹40,00,000 = ₹34,00,000.
Actual application = ₹32,00,000.
Unapplied income = ₹40,00,000 − ₹32,00,000 = ₹8,00,000.
The 15% portion is ₹6,00,000. The trust is allowed to leave this much unapplied without notice. It is not an extra exemption.
Shortfall = 85% × income − application = ₹34,00,000 − ₹32,00,000 = ₹2,00,000. Check: ₹8,00,000 unapplied − ₹6,00,000 = ₹2,00,000.
No notice was given, so the shortfall cannot be treated as accumulated. It is taxable.

Answer: Taxable income = ₹2,00,000, being the shortfall in application with no notice given. Had the trust given notice and invested ₹2,00,000 in permitted modes, nothing would be taxable now.

Example 2

Case: Seva Foundation, a registered charitable trust, has income of ₹20,00,000 for the tax year, computed commercially. This is after excluding a ₹5,00,000 donation received with a specific direction that it forms part of corpus. During the year it spent ₹12,00,000 on its objects in India and donated ₹2,00,000 to another registered trust. It gave no notice for accumulation. Compute its taxable income.

Show the solution

The corpus donation of ₹5,00,000 is not income, so income for the test is ₹20,00,000.
Required application = 85% × ₹20,00,000 = ₹17,00,000.
Application on own objects = ₹12,00,000.
Donation to another registered trust counts at 85% × ₹2,00,000 = ₹1,70,000.
Total application = ₹12,00,000 + ₹1,70,000 = ₹13,70,000.
Unapplied income = ₹20,00,000 − ₹13,70,000 = ₹6,30,000.
Free allowance = 15% × ₹20,00,000 = ₹3,00,000.
Taxable income = unapplied income − 15% allowance = ₹6,30,000 − ₹3,00,000 = ₹3,30,000. This equals the shortfall: ₹17,00,000 − ₹13,70,000 = ₹3,30,000.
Without notice for accumulation, this amount cannot be treated as accumulated, so it is taxable.

Answer: Taxable income = ₹3,30,000 (unapplied ₹6,30,000 less the 15% allowance of ₹3,00,000). The corpus donation stays outside income.

Exam tips

Start every written answer with registration status and validity. Examiners give marks for this line.
Show the 85% working in separate lines: income, target, application, shortfall. Marks follow the working even if one figure is wrong.
In case-scenario MCQs, look for traps: corpus direction, donation to another trust, spending outside India and borrowed funds.
Treat violations and anonymous donations as separate taxable additions, each with its own rate. Do not mix them into the shortfall.
Write conclusions in plain words: 'The trust is exempt except ₹X, which is taxable because …'. Cite section numbers only if you are sure of them from the Income-tax Act, 2025.

Practice questions from Assessment of Various Entities

Assessment of Trusts, Institutions and Funds in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Assessment of Trusts, Institutions and Funds: frequently asked questions

What is the 85% rule for charitable trusts?

A trust must apply at least 85% of its income for its objects in India during the tax year to claim exemption. The other 15% can be left unapplied without notice. A shortfall below 85% is taxable unless accumulated by notice and invested in permitted modes.

How long can a trust accumulate income?

Up to five years, with notice to the Assessing Officer and investment in the permitted modes. If the amount is not used for the objects in that period, or is diverted, it becomes taxable.

What is the difference between provisional and regular registration?

Provisional registration is given to a newly formed trust and is valid for three years. Regular registration follows, valid for five years, and must be renewed before it expires. Check the exact periods and deadlines in the Income-tax Act, 2025. Without valid registration the trust loses the exemption.

Are corpus donations taxable for a trust?

No, voluntary contributions received with a specific direction that they form part of the corpus are not treated as income. Without that direction, the amount forms part of income and is subject to the application test.

Can a charitable trust run a business?

Only if the business is incidental to its objects and separate books are kept. For general public utility objects, receipts from trade or business for a fee must stay within 20% of total receipts. Otherwise the object is not charitable.