Violations, Taxation of Trusts and Anonymous Donations

Understand Violations, Taxation of Trusts and Anonymous Donations

Key rules to remember

Anonymous donation taxable

Taxable = Anonymous donations − higher of (5% × total donations received, ₹1,00,000)

If anonymous donations do not exceed the higher figure, nothing is taxable. Total donations include the anonymous ones.

Rate on anonymous donation

Tax = 30% × taxable anonymous donation, plus applicable surcharge and cess

A special rate of 30%, not a slab rate. Surcharge and cess are added on top, as for the maximum marginal rate. The taxed amount does not get exemption again.

Exclusion from anonymous donation tax

Wholly religious trust: not taxed. Religious and charitable trust: not taxed, except donations meant for any university or other educational institution or any hospital or other medical institution run by it

A wholly charitable trust gets no exclusion. Check the nature of the trust first, then whether the donation is meant for an educational or medical institution run by it.

Tax on accumulated income after cancellation or conversion

Taxable = aggregate FMV of total assets − liabilities incurred in respect of those assets, at maximum marginal rate

Applies on cancellation of registration, on merger with a non-charitable entity, or if assets are not transferred to a similar charity on dissolution. Values are taken as on the specified date. Deduct only liabilities incurred in respect of the assets. Do not add your own exclusions for assets; use only what the question or the statute specifically gives.

20% receipts limit

Receipts from trade, commerce or business for a cess, fee or other consideration ≤ 20% × total receipts of the year

For the general public utility limb only. If it is exceeded, the general public utility object is not charitable for that year, and the exemption on income of that object is lost.

Business income exemption conditions

Business incidental to the objects AND separate books maintained

Applies to trusts for charitable purposes, not to religious trusts. If either condition fails, only the business income is excluded from exempt income. The trust's other income is not disturbed by this failure. This is different from a breach of the 20% limit, which makes the general public utility object non-charitable for the year.

How to solve Violations, Taxation of Trusts and Anonymous Donations questions

1. 1Identify the type of trust: wholly charitable, wholly religious, or both. Note the objects, since this decides the anonymous donation rule.
2. 2Check registration or approval status. If registration is cancelled, go to the accumulated income rule.
3. 3List each fact as one of: a related-person benefit, a non-genuine activity, business activity, or a donation. Match it to its rule.
4. 4For business of a charitable trust, test two things: is it incidental to the objects, and are separate books kept? If not, only the business income loses exemption. For the general public utility limb, also test the 20% receipts limit. A breach there makes the object non-charitable for the year, which is a bigger loss than losing the business income alone.
5. 5For anonymous donations, compute total donations, then the higher of 5% of that and ₹1,00,000, then the excess. Apply 30%. If the trust is religious and charitable, check whether the donation is meant for its educational or medical institution.
6. 6For a violation or cancellation, compute the amount (income misapplied, or aggregate FMV of total assets less liabilities incurred in respect of them) and apply the maximum marginal rate. Add surcharge and cess only if the question gives them, and treat them the same way in every part of your answer.
7. 7State the conclusion in provision, facts, conclusion form, with the tax figure in one line.

Quickest way: Four-line check for trust questions

Common mistakes in Violations, Taxation of Trusts and Anonymous Donations

• Taxing anonymous donations of a wholly religious trust.

  Students remember the 30% rate and skip the exclusion.

  Fix: Check the trust's objects first. Wholly religious means no tax. For a religious and charitable trust, tax only donations meant for any university or other educational institution or any hospital or other medical institution run by it.

• Taxing the whole anonymous donation instead of the excess.

  The threshold feels like a basic exemption limit.

  Fix: Deduct the higher of 5% of total donations or ₹1,00,000, then tax only the balance.

• Computing 5% on anonymous donations alone.

  The word 'anonymous' dominates the sentence.

  Fix: The 5% is on total donations received, anonymous plus named.

• Treating all business income of a trust as exempt, or treating the incidental-business test and the 20% limit as having the same effect.

  Students either think a charitable trust has exemption on everything, or mix up the two business-related rules.

  Fix: For a charitable trust, business income is exempt only if it is incidental to the objects and separate books are kept. If not, only that business income is excluded. The 20% limit is separate and applies only to the general public utility limb. A breach makes that object non-charitable for the year. Do not apply the incidental-business test to religious trusts.

• Applying slab rates when exemption is lost for a violation.

  Students treat the trust like an ordinary taxpayer.

  Fix: Use the maximum marginal rate on the violating income or accumulated income, as the provision requires. Mention surcharge and cess.

• Counting all liabilities, or excluding assets on your own assumption, in the accumulated income on cancellation.

  Students take total assets minus all liabilities mechanically, or assume some assets drop out because they were bought from income that was taxed in some way.

  Fix: Take the aggregate FMV of total assets and deduct only liabilities incurred in respect of those assets. Do not exclude assets unless the question or the statute specifically says so. Then apply the rate.

Worked examples