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.

Taxation of Trusts

To the extent that the income of the trust is not covered by an exemption, the income will be taxed in a manner similar to an Association of Persons (AoP). Hence, for an income of up to Rs.2.5 lakh rupees, there will be no need to pay tax. However, it should be noted that the AoP tax-rates will be applicable only for income which is not covered by the exemption offered under the Act to charitable trusts. The trust may violate any of the conditions relevant to which it was granted registration under the Act. In such circumstances, the income of the trust which has forfeited the exemption will be taxable at the maximum marginal rate (MMR). The provisions relating to taxability of trusts has been summarised in the following table:

S. No.	Circumstance	Tax Rate
1	The trust earns income for which an exemption is not available under the Act.	The income is taxed using the following slab-rate: Income-Tax: Upto Rs.2.5 lakh rupees- No tax is required to be paid. Rs.2.5 lakh to Rs.5 lakh- 5% of (taxable income less Rs.2.5 lakh) Rs.5 lakh to Rs.10 lakh- Rs.12500 plus 20% of (taxable income less Rs.5 lakh) Above Rs.10 lakh- Rs.112500 plus 30% of (taxable income less Rs.10 lakh) Surcharge: 10% of Income Tax, in case taxable income is above ₹ 50 lakhs. 15% of Income Tax, in case taxable income is above ₹ 1 crore. 25% of Income Tax, in case taxable income is above ₹ 2 crore. 37% of Income Tax, in case taxable income is above ₹ 5 crore. Cess: 4% of (Income Tax + Surcharge)
2	The trust has forfeited its status as a charitable trust on account of violating the conditions prescribed by the Act.	The trust should pay tax on the maximum marginal rate. For Assessment Year 2020-21, the rate is 42.744%. The rate is applicable only on that component of the income which can be attributed to forfeiture of the charitable status. For the remaining portion of the income, the AOP tax-rates (mentioned in the preceding entry) should be used.
3	The trust has converted itself into a non-charitable trust.	The maximum marginal rate of 42.744% should be applied on Accreted Income. Accreted Income refers to the amount of aggregate fair market value of total assets as reduced by total liabilities. This tax will be in addition to the regular Income Tax paid by the trust.

Income Tax Return Filing for Trust

Any Trust with a gross total income of more than the basic exemption limit is required to file income tax returns mandatorily. Also, the following types of trusts are required to file an ITR return mandatorily, irrespective of gross total income:

Research Association
News agency
Association or institution.
Fund or institution
University or other educational institution
Mutual Fund
Securitisation trust
Investor Protection Fund
Core Settlement Guarantee Fund
Venture capital company or venture capital fund
Trade union
Body or authority or Board or Trust or Commission
Infrastructure debt fund
Business trust

Due Date for Filing Trust Tax Return

The due date for income tax filing for Trusts are as follows:

September 30 if the Trust is required to get its accounts audited under the Income Tax Act or under any other law.
November 30 if the Trust is required to file Form No. 3CEB. Form 3CEB will be required if the trust has entered into certain types of related party transactions.
July 31 if the Trust does not need to get its accounts audited.

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. In case the Trust is required to get its accounts audited, then the income tax return must be e-filed along with the Digital Signature of the Chartered Accountant who is responsible for carrying out the audit. Learn about the concept of Tax Audit turnover in Income Tax.

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