Section 11 of Income Tax Act: Tax Exemption for Charitable and Religious Trusts

What is Section 11 of the Income Tax Act?

Section 11 of the Income Tax Act is a special provision that gives tax exemption to charitable and religious trusts. Normally, any income earned by an organization is taxable under the Income Tax Act. But if a trust is formed for charitable or religious purposes, the government provides relief by exempting its income from tax.

The main purpose behind Section 11 is to encourage organizations to engage in social welfare, education, health, and other charitable activities. This way, more funds can be used directly for helping society rather than being spent on taxes.

For example, if a charitable trust earns income through rent from property or donations from people, it can use that money for running schools, hospitals, or community development. Since the income is spent on welfare, the law does not tax it.

Who Can Claim Tax Exemption Under Section 11?

Not all organizations can claim exemption under Section 11. To be eligible, a trust or institution must meet certain requirements.

1. Charitable and Religious Trusts: The law applies to both charitable trusts (like those working for education, medical relief, relief of the poor) and religious trusts (like temples, mosques, churches, etc.).
2. Purpose of the Trust: The trust must be set up for activities defined as charitable or religious under Section 2(15) of the Income Tax Act. These include:
   • Relief of the poor
   • Education
   • Medical relief
   • Preservation of the environment
   • Advancement of any other object of general public utility
   • Religious advancement and spiritual activities
3. Registration Under Section 12AB: The trust must be registered with the Income Tax Department under Section 12AB to avail benefits of Section 11. Without registration, exemptions cannot be claimed.

What Types of Income are Exempt Under Section 11?

Several types of income can be exempt under Section 11 if used properly. These include:

1. Income from Property Held for Charitable or Religious Purposes: If the trust owns property such as buildings, land, or assets and uses the income (like rent) for charitable or religious purposes, that income is exempt.
2. Voluntary Contributions and Donations: Donations received by the trust are exempt from tax if they are not marked as “corpus donations” and are applied to charitable or religious purposes.
3. Income Applied for Charitable Activities: If a trust earns income from other sources (like investments or businesses that are incidental to its activities), it will be exempt provided the income is applied towards welfare activities.

How to Claim Tax Exemption Under Section 11?

Charitable and religious trusts must follow a proper process to claim exemption.

1. Documentation Required:
   • Trust deed or registration certificate
   • Registration under Section 12AB
   • Income and expenditure statements
   • Details of donations and voluntary contributions
   • Audit report (if required)
2. Application of Income and Accumulation Rules:
   • At least 85% of the income must be applied (spent) on charitable or religious purposes in India during the financial year.
   • If income cannot be applied fully in the same year, the trust may accumulate it for up to 5 years by filing Form 10.
3. Filing Process for Trusts:
   • Trusts must file an Income Tax Return (ITR-7 form) within the due date.
   • Attach necessary documents such as audit reports and details of application of income.

Conditions and Compliance Requirements

Section 11 exemptions come with strict compliance rules. Some important conditions include:

1. 85% Application Rule: A minimum of 85% of the income should be used for charitable or religious purposes each year.
2. Audit Requirements: If the total income of the trust exceeds the exemption limit, it must get its accounts audited and file the audit report with the Income Tax Department.
3. Restrictions on Usage of Income:
   • The income cannot be used for the benefit of the founder, trustees, or their relatives.
   • Funds should not be diverted to non-charitable purposes.
   • Political activities are not allowed.

Importance of Section 11 for Charitable and Religious Trusts

Section 11 plays an important role in encouraging social development and welfare.

1. Benefits for Promoting Welfare Activities: Since trusts do not need to pay tax on their income, they can use more money for public good like free education, medical services, food distribution, etc.
2. Encouragement for Social Development: Many NGOs and institutions rely on donations. Section 11 ensures that these donations are not taxed again, encouraging people to donate more.
3. Real-life Impact: For example, a trust running a free hospital can save tax on income and instead use those funds to buy medicines, upgrade facilities, or treat more patients.