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    Charitable Trusts – Taxability and Tax Return Filing

    A charitable trust is a type of entity formed to provide the public with religious or humanitarian facilities. Trusts that are formed for charitable or religious purposes and not intended to do commercial activities are allowed various benefits under the Income-Tax Act. In this article, we look at such benefits and the procedure for filing Trust income tax return.

    Eligibility for Exemption

    The Income Tax Act exempts the income of a charitable trust from the scope of Income Tax. However, the exemption will be granted on the fulfilment of the specified conditions. The specified conditions are the following:

    • The trust should be registered with the Commissioner of Income Tax as a Charitable Trust which is eligible for exemption under the Act. The registration shall be made in accordance with the guidelines available in Section 12A of the Act.
    • The property of the trust should be bound by a trust deed or another similar legal obligation.
    • The purpose of holding the property should be a charitable or religious purpose.
    • The trust should not have been created for the benefit of any particular religious community or caste group.
    • The income of the trust should not be applied for the benefit of the settlor or any person who can be considered as a close relative of the settlor.
    • An exemption will be available exclusively for the portion of the income which is applied towards charitable or religious purposes.
    • In case the income of the trust exceeds the basic exemption limit, the trust should mandatorily submit the books of accounts for audit. Assessees may note that in this context, income refers to the earnings of the trust prior to allowing the exemption offered by the Act to charitable trusts.
    • The trust should submit the return of income if the income of the trust exceeds the basic exemption limit. The due date for filing the return varies depending on the circumstances of the trust.
    • The trust may earn income which is accumulated towards application in the future. In such cases, the income which is accumulated towards future application should be invested separately. The mode of investment should comply with the provisions of the Act.

    How to File Income Tax Return for Trust?

    The income tax return of Charitable Trusts must be filed using ITR 5 return filing or ITR 7. In case the Trust is required to file an income tax return due to taxable income being in excess of the basic exemption limit, then ITR 5 can be filed. In case the Trust is required to file income tax return mandatorily under Sections 139(4A) or139(4B) or 139(4C) or 139(4D) or 139(4E) or139(4F) of the Income Tax Act, then ITR 7 must be filed. It is mandatory for all trusts to e-file income tax return.

    ITR-7

    For persons including companies required to furnish returns under section 139(4A) or section 139(4B) or section 139(4C) or section 139(4D) or section 139(4E) or section 139(4F).

    • Return under section 139(4A) is required to be filed by every person in receipt of income derived from property held under trust or other legal obligation wholly for charitable or religious purposes or in part only for such purposes.
    • Return under section 139(4B) is required to be filed by a political party if the total income without giving effect to the provisions of section 139A exceeds the maximum amount, not chargeable to income-tax.
    • Return under section 139(4C) is required to be filed by every –
      • Scientific research association
      • News agency
      • Association or institution referred to in section 10(23A)
      • Institution referred to in section 10(23B)
      • Fund or institution or university or other educational institution or any hospital or other medical institution
    • Return under section 139(4D) is required to be filed by every university, college or other institution, which is not required to furnish a return of income or loss under any other provision of this section.
    • Return under section 139(4E) must be filed by every business trust which is not required to furnish a return of income or loss under any other provisions of this section.
    • Return under section 139(4F) must be filed by any investment fund referred to in section 115UB. It is not required to furnish a return of income or loss under any other provisions of this section.

    Frequently Asked Questions

    • Do trusts need to file income tax returns?

      It is mandatory for all trusts to e-file income tax return.

    • Which form of ITR to be filed by trust?

      In case the Trust is required to file income tax return mandatorily under Sections 139(4A) or139(4B) or 139(4C) or 139(4D) or 139(4E) or139(4F) of the Income Tax Act, then ITR 7 must be filed. It is mandatory for all trusts to e file income tax return.

    • What is Form 10B?

      Form 10B is to be furnished by a charitable or religious trust or institution that has been registered u/s 12A or who has submitted an application for registration by filing Form 10A. Form 10B is an audit report which is provided by a CA upon nomination by the taxpayer.

    • what is 85% rule of trust?

      if a trust is not able to apply 85 per cent of its income in a particular year, it can accumulate the shortfall to be used for religious or charitable purposes within the next 5 years.

    • Is there any exemption for trusts/NGOs under income tax?

      Yes, trusts/NGOs that are registered under Section 12A/12AA of the Income Tax Act can claim exemptions on income derived from charitable activities. If the trust follows the prescribed rules and its income is used for charitable purposes, it may not be subject to tax.