Income Not Included in Total Income: Charitable and Religious Trusts

Understand Income Not Included in Total Income: Charitable and Religious Trusts

Key rules to remember

Benchmark application

Benchmark application = 85% × income of the trust for the year

This is a computational threshold, not a pass/fail test. Unapplied income up to 15% can be accumulated, and only the excess is taxed. Application must be for the trust's objects and in India. Capital expenditure on the objects counts as application.

Maximum accumulation

Accumulation allowed = lower of (Income − Amount applied) and (15% × Income)

Only income that was not applied can be accumulated, and the cap is 15% of the income of the year. It must be set apart by a statement in the prescribed form before the due date for the return and invested in specified modes. Accumulation period is up to 5 years. Unapplied income above the cap is taxable.

Taxable income of a trust (working)

Taxable income = Income − Amount applied − Valid accumulation (lower of unapplied income and 15% of income) + Income caught by violations

Corpus donations and other items outside the test are excluded first. Violations are dealt with in a separate topic.

General public utility limit

Receipts from business or fee-based services ≤ 20% of total receipts

Applies only where the charitable purpose is advancement of any other object of general public utility. If exceeded, that purpose is not charitable for the year.

Foreign application

Application outside India only for promoting international welfare in which India is interested, and as directed by the Board

Otherwise, application outside India is not application for the 85% test.

Registration validity

Provisional registration: valid for 3 years. Regular registration: valid for 5 years.

Apply for regular registration at least 6 months before the provisional registration expires, or within 6 months of commencement of activities, whichever is earlier.

How to solve Income Not Included in Total Income: Charitable and Religious Trusts questions

1. 1Check registration or approval. If the trust is not registered or approved, state that exemption is not available and stop.
2. 2Identify the purpose. Confirm that the property is held wholly for charitable or religious purposes. Confirm the trust or institution is not created or established for the benefit of a particular religious community or caste, as such a trust is denied exemption. The exception is a trust created for the benefit of Scheduled Castes, Scheduled Tribes, backward classes, or women and children. For a general public utility trust, test the 20% receipt limit.
3. 3Compute the income of the trust for the year as per its accounts, after revenue expenses. Separate out voluntary contributions that are for corpus.
4. 4Compute application: revenue and capital expenditure on the objects, in India. Do not count investments in non-permitted modes or application outside India that is not allowed.
5. 5Compare application with the 85% benchmark. If application is lower, check how much of the unapplied income, up to 15% of income, was validly accumulated by the prescribed statement and invested in specified modes. Only the excess is taxable.
6. 6Test for violations: benefit to specified persons, non-permitted investments, business not incidental to objects, or no separate books. Add such income back as taxable.
7. 7State the taxable income and conclude in provision-facts-conclusion form.

Quickest way: 85-and-15 shortcut

Common mistakes in Income Not Included in Total Income: Charitable and Religious Trusts

• Treating all receipts as income and applying 85% to corpus donations as well.

  Students see total receipts in the question and do not separate the voluntary contributions given for corpus.

  Fix: Remove voluntary contributions directed to corpus before the 85% test, and check that the corpus is invested in permitted modes.

• Allowing the full 15% accumulation when the trust has set apart a larger amount.

  Students accept the amount the trust shows in its books.

  Fix: Cap valid accumulation at 15% of income. The excess set apart is taxable unless it is covered by actual application.

• Ignoring registration and discussing only application.

  Application of income is the calculation-heavy part, so it gets all attention.

  Fix: Always write the registration gate first. No valid registration means the exemption claim fails regardless of application.

• Counting application outside India as application.

  Students assume that money spent on charity anywhere qualifies.

  Fix: Application must be in India. The exception is a purpose promoting international welfare in which India is interested, as directed by the Board.

• Applying the 20% limit to every charitable trust.

  The limit is memorised as a trust rule without its condition.

  Fix: The 20% limit is relevant when the purpose is only advancement of any other object of general public utility. A trust for relief of the poor, education or medical relief is tested on the usual conditions.

• Counting both the spending from borrowed funds and the later repayment of the loan as application, which is double counting.

  Students do not distinguish between application from borrowed money and the later repayment.

  Fix: Application from borrowed funds is not treated as application when the money is spent. It is treated as application when the loan is repaid out of income. Count it once, at repayment, and not twice.

Worked examples