Income Tax Proposal for Charitable Trusts to be painful for the poor & needy

by CA. R. Hariharan Thangavel

March 26th, 2024

Conditions for Exemption of Income

In order to qualify for tax-exempt status, a charitable trust may need to meet the following requirements,

At least 85% of income of the trust or institution should be applied during the year for the charitable or religious purpose either themselves or by making donations to the trust with similar objectives.
If donated to other trusts or institutions, the donations should not be towards corpus to ensure that the donation is applied by the donee trust or institution to be treated as application of income.
Every trust or Institution registered under 12AA/12AB is allowed to accumulate 15% of its income each year without any tax impact. The remaining 85% has to be applied towards eligible charitable purposes to claim tax breaks.

Payments made to other trusts with similar objectives

In Finance Bill 2023, it is proposed that only to the extent of 85% of the total eligible donations made by a trust or institution registered under 12AA/12AB to another trust or institution registered under 12AA/12AB shall be treated as application of income.

Prior to this proposal 100% of the eligible donation made by a trust or institution registered under 12AA/12AB to another trust or institution registered under 12AA/12AB shall be treated as application of income.

In the budget memorandum, the Government said that several institutions are attempting to defeat the intention of the legislature by forming multiple trusts and accumulating 15% at each layer thereby saving taxes. The Government is looking to plug the loophole.

New tax law proposed in the budget 2023, trims the tax benefit for donor organisations and it affects both top corporate donors and trusts which carry out charitable activities. The proposed amendment will discourage donations to smaller charities by curbing its resources thereby affecting the needy.