Understanding Recent Amendments to Income Tax for Charitable Trusts and Institutions

Amendments to Income Tax Provisions for Charitable Trusts and Institutions

Changes in Section 11(1)(d)

The amendment to Section 11(1)(d), effective from April 1, 2022, states:

• Income from voluntary contributions directed to form part of a trust or institution's corpus is subject to specific investment conditions.
• Previously, such income was fully exempt. Now, it is only exempt if the contributions are invested or deposited according to the modes outlined in Section 11(5).

Insertion of Explanation 4 to Section 11(1)

A new Explanation 4 has been added to Section 11(1) to clarify the treatment of applications for charitable or religious purposes:

1. Application from Corpus:

   • Amounts applied for charitable or religious purposes from the corpus (as per clause (d)) will not be treated as income applications.
   • If the amount is later deposited or invested following the specifications of Section 11(5), it can be considered as applications for charitable or religious purposes in the previous year to the extent of such investment.

2. Applications from Loans:

   • Applications for charitable or religious purposes funded through loans shall not count as income applications.
   • Any amount repaid from these loans will then be recognized as an application of income for charitable or religious purposes in the previous year to the extent of repayment.

Clarification on Income Calculations

Another amendment clarifies that calculations regarding the income that must be applied or accumulated must not include any set-offs or deductions from excess applications in preceding years. As a result, charitable trusts or institutions are barred from claiming carry-forwards of losses, deductions, or prior excess applications when determining the income needed to be applied or accumulated in the current year.

Amendments to Section 10(23C) for Educational and Medical Institutions

Amendments have also been made to Sections 10(23C)(iiiad) and 10(23C)(iiiae):

1. Educational Institutions:

   • Any educational institution must exist solely for educational purposes and not for profit. The exemption applies if annual receipts do not exceed a prescribed threshold.

2. Medical Institutions:

   • Hospitals and institutions treating individuals for illness or rehabilitation must operate solely for philanthropic purposes. They, too, qualify for exemption if annual receipts are within the prescribed limits.

3. Combined Receipt Limitation:

   • If a person receives income from both educational and medical institutions mentioned above, the exemptions will not apply if the total annual receipts exceed Rs 5 crores (an increase from the previous limit of Rs 1 crore).

These amendments aim to ensure that charitable institutions and trusts operate within specified financial limits to retain their tax-exempt status, thus enabling better compliance and fiscal responsibility.