Understanding Recent Amendments to Income Tax for Charitable Trusts and Institutions

A New Era for Corpus Donations

Remember when a corpus donation was pretty straightforward? If someone gave money specifically to build up your organization’s corpus, it was exempt from tax, no questions asked. Not anymore. Since April 1, 2022, thanks to changes in Section 11(1)(d), that exemption only holds if the donation is invested or deposited in certain approved ways—think scheduled banks, government securities, and a few other instruments listed in Section 11(5) of the Income Tax Act.

This change was really about plugging loopholes. The government wanted to make sure that charities couldn’t just park corpus funds anywhere and still claim exemptions. For organizations that got these donations before April 2022 and put them in, say, mutual funds (which aren’t on the approved list), there’s a problem. Unless they move that money into one of the approved options, they’ll lose their exemption status from Assessment Year 2023-24 onward. The Income Tax Appellate Tribunal has clarified that this rule only applies from April 2022, so older investments aren’t immediately at risk—but it’s still a headache for many.

When You Spend from the Corpus

There’s also a new rule—Explanation 4 to Section 11(1)—about what happens if you use corpus funds for charitable purposes. The idea is simple: if you dip into the corpus, that spending won’t count as an “application of income” unless you put the money back into an approved investment within five years. This is meant to stop organizations from slowly draining their corpus while still claiming all the tax benefits.

And what if you use a loan to fund charitable work? The rules have been tightened here, too. Now, using borrowed money for charitable activities doesn’t count as an application of income. Only when you repay the loan can you claim that repayment as an application, and only up to the amount you actually pay back. This stops anyone from trying to game the system with clever accounting tricks.

Bigger Thresholds for Educational Institutions

There’s some good news for schools and colleges. The Finance Act 2021 raised the annual receipt threshold from ₹1 crore to ₹5 crores for educational and medical institutions under Sections 10(23C)(iiiad) and (iiiae). That means more institutions can qualify for direct tax exemption without jumping through extra hoops.

To get this exemption, your institution must be purely educational, not-for-profit, keep proper books, and pass an audit. The ₹5 crore limit covers all your main income—fees, donations, and so on. But watch out: the Allahabad High Court has said that interest income and other non-operational receipts don’t count toward this limit.

If your institution is mostly funded by the government (more than 50% of your total receipts), you’re in luck—you get a full tax exemption with no limit on your receipts. Private institutions, though, have to stick to the ₹5 crore cap or get special approval for higher amounts.

A New Tax Regime for Charities

The Finance Act 2022 introduced Section 115BBI, which is a game-changer. From April 1, 2023, certain types of income for charitable institutions are taxed at a flat 30% rate—plus surcharge and cess, which can push the effective rate up to nearly 35%. This “specified income” includes things like income accumulated beyond the allowed 15%, income from breaking the rules on investments or applications, or income sent abroad without proper approval.

This is a big deal. Compliant organizations still get their exemptions, but if you slip up, you’re hit with the highest tax rate in the country. That’s a strong incentive to keep your paperwork and processes in order.

Tougher Penalties

The Finance Act 2022 also brought in Section 271AAE, which ramps up the penalties for breaking the rules. If you use charitable funds to benefit someone who shouldn’t be getting them—like a trustee or someone with a big stake in the organization—you could be fined 100% of the amount for a first offense, and 200% for repeat offenses. These penalties apply to both trusts and institutions under Section 10(23C), and they come on top of losing your exemption status. Ouch.

Accumulation and Investment Rules

The rules about accumulating income have also been tightened. You used to be able to carry forward excess applications from previous years to offset current requirements. Not anymore. Now, you have to apply at least 85% of your income each year, and you can only accumulate up to 15%—and that has to be used within five years, invested in approved instruments, and properly documented with Form 10.

If you don’t use the accumulated income within five years, it’s treated as taxable income in the last year of the accumulation period. No grace period, no excuses. You’ll need to keep careful track of these funds to avoid a nasty surprise at tax time.

Limits on Donations Between Charities

Starting April 1, 2024, the Finance Act 2023 says that if your charity donates to another registered charity, only 85% of that donation counts as an application for charitable purposes. This is meant to make sure that donations actually reach the people who need them, rather than just moving money around between organizations.

This could affect collaborative projects, where several charities pool their resources. You’ll need to adjust your accounting to reflect that only 85% of these donations count toward your application requirements.

Stronger Registration and Compliance

The registration process for charities has gotten stricter. Under Section 12AB, you now have to show that you’re actually doing charitable work, not just registered. The tax authorities can look at your activities, governance, and past compliance before giving you the green light.

You’ll also need to keep proper books, get regular audits, file your returns on time, and show that you’re following all the investment and application rules. If you’re late with your registration or re-registration, you could face an “exit tax” of nearly 35% on your accreted income—on top of the usual triggers like converting to a non-charitable form or transferring assets to a non-charitable entity.

Practical Tips for Charities

All these changes mean that charities and educational institutions need to step up their game when it comes to financial planning and compliance. You’ll want to set up investment committees to make sure your corpus funds are in the right places, create systems to track accumulated income and its use, and put in place governance structures that prevent anyone from getting improper benefits.

It’s also a good idea to get help from a qualified tax professional to review your setup and spot any potential problems. Regular compliance audits can save you a lot of headaches down the road.

Technology can help, too. With all the new documentation and tracking requirements, you’ll need robust systems to keep records of donations, investments, applications, and accumulations. More and more organizations are turning to specialized software to automate these processes and stay on top of the ever-changing rules.

Wrapping Up

The changes introduced by the Finance Acts of 2021–2023 are some of the biggest shifts in charitable taxation in years. They’re designed to make sure that tax exemptions are only given to organizations that are genuinely doing charitable work and managing their finances responsibly.

Yes, these changes mean more work and tighter controls, but they’re also an opportunity to build trust and credibility. Charities and educational institutions that adapt quickly and put strong compliance systems in place will be in the best position to keep their tax-exempt status and continue making a real difference in their communities.