Taxation Matters of a trust – Part 1 (Detailed Analysis)

Taxation Matters of a trust – Part 1: Due to long discussion we discuss this article in two or three articles. In this article we discuss complete details for Taxation Matters of a trust –  Part 1 like – Requisites for exemption, Deemed to be registered, Various Conditions Fulfilled for Taxation of trusts etc. Now you can scroll down below and check complete details for “Taxation Matters of a trust – Part 1”

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Taxation Matters of a trust – Part 1

As per Indian trust act enacted in 1882, trust is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another or of another and the owner.

private trusts are formed to benefit specified persons and not to the public at large. They may be intended to do commercial activities.
Private trusts are created and governed by the provisions of the Indian Trusts Act, 1882.

public trusts are generally formed for charitable or religious purposes with a motto of serving the large public. Income tax act provides exemption to the Income of Charitable and religious trusts. These are not governed by the trust act 1882.

Requisites for exemption :

Income Tax Act 1961 requires a trust to get registered under section 12AA to avail the exemption of income.

Every trust which wants to avail exemption shall make an Application to the Commissioner of Income tax or director Of Income Tax as prescribed by the act in Form 10A. This form should be submitted along with required documents which are enough to prove that the trust is genuine.

After providing necessary documents Commissioner of income tax may pass an order either granting or rejecting the registration of trust.

Deemed to be registered :

The Communication of Acceptance or rejection of any application shall be made within six months from the end of the month in which the application was received.If no communication is received within 6 months then trust will be deemed to be registered under section 12AA.

If the application for registration is rejected :

(1) If the application for registration is rejected by the income tax officer or Director of income tax or commissioner of income tax due to any reason then it can’t get its income exempted u/s 11, 12. And it also can’t enjoy the provisions of 80G.

Conditions to be fulfilled :

(1) The trust shall expend at least 85% of the total donation received by it during the year.
If the 85% of the total receipts is spent for its purpose then remaining 15% will be exempted from the Tax.

(2) Even though the trust has not spent such 85% of its income in the year of receipt by setting apart the balance amount (85%-actually spent) by passing a resolution by the trustees to spend it for the activities of trust in next 5years.

(3) The amount set apart for expending in future shall be invested in the securities Specified u/s 11(5) of the Act and within the prescribed time limit and in prescribed manner.

(4) If the amount set apart is not spent within 5 years then It will be a part of the Total income In 6th year.

(5) Donations received by the trust towards corpus funds is not covered under the total income which is to be expended at least 85%.
Because corpus donations are given in respect of a specific activity to be performed by the trust. The person who is donating the amount in respect of corpus fund specifies the activities in respect of which the amount should be expended.

There are some more provisions related to trust regarding taxability of its income which I will cover in my subsequent posts.

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