Section 11 of the Income Tax Act: Tax Exemption for Charitable Trusts

To encourage the work of religious and charitable organizations, the Indian government offers tax exemptions under Section 11 of the Income-tax Act. These benefits apply only to specific types of income, and eligible entities must meet certain conditions to claim them.

Budget 2025 Update

The 2025 Budget proposed an amendment to the Explanation of sub-section (4) of Section 12AB, clarifying that incomplete applications for registration of a trust or institution will not be considered a specified violation under this provision.

Understanding Section 11

Section 11 allows charitable trusts and institutions to claim exemption on income generated from their property, provided it is used exclusively for religious or charitable purposes. To avail this benefit, entities must:

• Obtain registration under Section 12A or 12AA of the Income Tax Act.
  
• Maintain proper books of accounts and have them audited by a Chartered Accountant.
  
• File both the Audit Report and Income Tax Returns within the due dates.
  

Key Conditions to Qualify for Exemption

• Donations received must be for purposes specified under Section 12.
  
• Trusts must comply with Sections 11(5) and 13(1) regarding fund deposits, investments, and mode of operation.
  
• Income should not directly or indirectly benefit the settler.
  
• The institution or trust should not favor a specific religious caste or community.
  
• The property or income must not be used for the benefit of any person covered under Section 13(3), including founders, managers, trustees, authors, or their relatives.
  

By adhering to these requirements, charitable and religious institutions can maximize the tax exemptions available under Section 11.

Income for International Welfare and Section 11 Exemption

Income used by charitable institutions for promoting international welfare is also eligible for tax exemption under Section 11, subject to certain conditions:

• Trusts established before 1st April 1952: Income used for philanthropic or religious purposes outside India qualifies for exemption.
  
• Trusts created on or after 1st April 1952: Income used to promote global welfare activities in which India participates is eligible for deductions.
  

Exemption Under Section 11 of the Income Tax Act

The following types of income are exempt from tax under Section 11:

• Income generated from property of institutions engaged in religious or charitable activities.
  
• Up to 15% of the total income earned or received by the trust from such activities in the previous financial year.
  
• Voluntary contributions received by the trust, provided they are specifically directed to form part of the corpus of the institution or trust.
  
• Capital gains arising from the transfer of a capital asset are exempt if the net proceeds are fully utilised to acquire a new capital asset held under trust for wholly charitable or religious purposes. In such cases, the entire capital gain is treated as applied for charitable purposes.

Section 11(2) of the Income Tax Act: Accumulation of Income

Section 11(2) allows charitable institutions and trusts to accumulate a portion of their income instead of immediately applying it for charitable purposes. Key points include:

• Trusts can retain up to 15% of their income generated in a financial year without applying it to charitable activities.
  
• This retained income can be added to the corpus of the trust and does not need to be spent in future years.
  
• Any accumulation beyond 15% must be utilised for charitable purposes within the next five years.
  

Exemptions from including this accumulation in total income apply if:

• Funds are invested in modes prescribed under Section 11(5).
  
• Form No. 10 is submitted, notifying the assessing officer of the accumulation at least two months before the IT return due date.
  
• The purpose for which the funds are set aside is clearly mentioned.
  
• Income is retained due to a court order or injunction.
  

---

Section 11(4) of the Income Tax Act: Business Income of Charitable Institutions

Section 11(4) applies when charitable institutions own business undertakings. It specifies:

• The Assessing Officer can evaluate the business income to determine if it exceeds the income reported in the accounts.
  
• Any excess income is presumed to be used for purposes other than charitable or religious activities, and may not qualify for exemption.
  

---

Section 11(5) of the Income Tax Act: Permissible Modes of Investment

Section 11(5) outlines the approved investment modes for charitable trusts to retain or accumulate income while still qualifying for tax exemption:

1. Immovable property (excluding machinery and plants).
   
2. Investments under the Government Savings Certificates Act, 1959, or other securities issued under Central Government Small Savings Schemes.
   
3. Public sector company shares, subject to prescribed conditions.
   
4. Deposits with scheduled banks or cooperative banks (including land mortgage/development banks).
   
5. Deposits in Post Office Savings Bank Accounts.
   
6. Investments in UTI units.
   
7. Securities issued by financial corporations engaged in long-term industrial financing in India (eligible under Section 36(1)(viii)).
   
8. Bonds issued by public companies in India for long-term urban infrastructure financing.
   
9. Debentures guaranteed by the Central Government.
   
10. Shares and mutual fund units of the National Skill Development Centre.
    
11. Deposits with the Industrial Development Bank of India.
    
12. Other investment modes as prescribed by the Central Government.
    

By adhering to these provisions, charitable institutions can safely accumulate and invest income while remaining eligible for tax exemptions under Section 11.

FAQs on Section 11 & Related Provisions for Trusts

1. What is the exemption limit for a trust?
A trust or institution engaged in charitable or religious activities can claim exemption on up to 15% of the income earned from its properties under Section 11 of the Income Tax Act. This applies to income generated from properties held for charitable or religious purposes.

2. Is a donation received by a trust taxable?

• Donations for religious purposes: Fully exempt from tax.
  
• Anonymous donations for educational or medical purposes: Taxable under Section 115BBC, where 5% of the donation amount or ₹1,00,000, whichever is higher, is taxable.
  

3. What is the exemption under Section 11(1A)?
Section 11(1A) allows trusts to claim exemption on up to 15% of the income from properties used for religious or charitable activities. It also covers transfers of capital assets held wholly or partly for charitable purposes.

4. What are the eligible investment modes under Section 11(5)?
Trusts can invest their income in specified modes to maintain tax-exempt status, including:

• Deposits in Central Government securities
  
• Post Office Savings Accounts
  
• UTI units
  
• Shares of public sector companies
  

5. What are the implications of Section 11(3) for charitable and religious trusts?
Section 11(3) provides that income earned from properties held for charitable or religious purposes is exempt from tax.

• If a trust violates the conditions laid out under Section 11(3), it may lose its tax-exempt status and become liable to pay tax on the income.
  

6. What is Section 12A of the Income Tax Act?
Section 12A mandates registration of a trust or institution to claim tax exemption under Section 11. Only registered trusts are eligible to claim exemptions.

7. What is Section 12AA of the Income Tax Act?
Section 12AA prescribes the procedure for registering trusts or institutions. All trusts claiming exemption under Section 11 or Section 12 must apply for registration with the Income Tax Department to maintain eligibility.

8. What is the main benefit of Section 11?
Section 11 allows charitable or religious trusts to exempt up to 15% of their total income from tax, enabling them to fully utilize funds for their stated objectives.

9. What is Section 11(1A) regarding capital asset transfers?
Section 11(1A) covers situations where capital assets held by a trust are transferred, either wholly or partly, for charitable or religious purposes. Proper compliance ensures continued exemption for income from such assets.

10. Are voluntary contributions for charitable purposes fully exempt?
Yes, voluntary contributions to a registered charitable trust are generally exempt from tax, provided the funds are utilized for the intended charitable purposes and invested in approved modes under Section 11(5).

11. Can foreign donations be exempt under Section 11?
Yes, foreign contributions received by a trust registered under FCRA (Foreign Contribution Regulation Act) can be claimed as exempt under Section 11, subject to utilization rules and reporting requirements.

12. What happens if a trust does not utilize income for charitable purposes?
If the trust fails to apply its income towards charitable or religious activities, the unused portion exceeding 15% of the income becomes taxable in the hands of the trust.