Taxation of Anonymous Donations Received by Trusts

Understand Anonymous Donations and Tax on Trust Income

Key rules to remember

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.

How to solve Anonymous Donations and Tax on Trust Income questions

1. 1Confirm the entity is a registered non-profit organisation and note its objects: wholly charitable, wholly religious, or wholly charitable and religious.
2. 2Decide if the entity is excluded. A wholly religious body, or a wholly charitable and religious body, is outside the rule.
3. 3Check for a specific direction. If a donation to a wholly charitable and religious body was for its university, educational institution, hospital or medical institution, treat it as anonymous and covered.
4. 4Total all donations received in the tax year, identified and anonymous, and total the anonymous donations that are covered.
5. 5Compute the limit: higher of ₹1,00,000 and 5% of total donations received.
6. 6Specified income = covered anonymous donations − limit, and nil if the limit is higher.
7. 7State the tax year as the year of receipt, and conclude with the amount taxable.
8. 8If asked for tax, apply the special rate given in the question or your study material, and say so.

Quickest way: Three-check shortcut

Common mistakes in Anonymous Donations and Tax on Trust Income

• Taking 5% of anonymous donations instead of total donations.

  The word anonymous in the sentence pulls the eye to the wrong base.

  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%.

  Students read the limit as cumulative.

  Fix: The limit is whichever is higher. Pick one figure and deduct it once.

• Exempting every religious trust fully.

  Remembering the exception without its condition.

  Fix: A wholly charitable and religious body loses the exception for a donation directed to its university, educational institution, hospital or medical institution.

• Taxing the whole anonymous amount when it is within the limit.

  Ignoring the exclusion words in the table.

  Fix: Anonymous donations up to the limit are excluded. Tax only the excess.

• Taxing the donation in the year it is spent.

  Confusing it with application of income rules.

  Fix: The year of charge is the tax year of receipt, whatever happens later.

• Treating a trust that has some non-religious purposes as wholly religious.

  Reading the word religious loosely.

  Fix: The exception needs the body to be created wholly for religious, or wholly for charitable and religious, purposes.

Worked examples