Income of a Religious Trust under Income Tax Act, 1961

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Income of a Religious Trust under Income Tax Act 1961

The definition of Religious Trusts is not present under the Income Tax Act, 1961. The creation of a Religious Trust is mandated by the special law of a certain faith. Furthermore, in accordance with conventional principles, trust is only involved in the exercise of their own faith and belief. Most ‘Religious Trusts’ also fund other causes, such as ‘education, “medical facilities,’ ‘food for the needy,’ and so on. In this article, we’ll discuss the Income of a Religious Trust under Income Tax Act, 1961.

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What is Religious Trust under Income Tax Act, 1961?

The Income Tax Act, 1961 does not specify religious trusts. The formation of a Religious Trust is controlled by religious personal laws. However, in a broader sense, it may be defined as Trusts that are involved in activities that promote religion or a certain belief. However, most Religious Trusts also support philanthropic objectives, such as education, medical facilities, supplying food to the destitute, and so on, and these sorts of Trusts are known as Charitable & Religious Trusts. 

Formation of Religious Trust

Trusts are classified into two types:

  • Private Trust  
  • Public Trust

The requirements of the Indian Trusts Act, 1882 apply to all private trusts. Its formation is also governed by the sort of trust. In all states, there is no one Act that governs Trust applications. However, other states, like Bihar, Madhya Pradesh, and Orissa, have enacted their own legislation outlining the standards and procedures for the management of Public Trusts.

Our Experts will help you with registration or formation of Trust, Section 8 Companies efficiently. 

Important Elements of the Religious Trust Deed

The following are the important elements of the religious trust:

  • Objects: This specifies the reason for which the trust is founded. It is a mandatory provision since all activities must be carried out solely for the purposes mentioned.
  • Approval of Reserves: The Trust may acquire gifts, grants, recommendations; accept aids or donations in cash or kind, including immovable property, from any individual, government, or other religious institution. However, it shall not accept any such monies acquired with a condition that is inconsistent with the trust’s aims and objectives.
  • Expenses: It is the trustees of trust’s job to allocate the organization’s finances efficiently.
  • Control of the Trustees: The trustees do not have permission to do any act that exceeds their skills, as detailed in the trust deed. The trustees are charge with the following obligations for the trust’s overall behaviour and supervision:
    • Employees are employed
    • Trading, modifying, disposing of, or separating the trust properties
    • In charge of ‘opening bank accounts’ in the title account of trust
    • File a lawsuit on the trust’s behalf.
    • Take any gift, contribution, or offering and keep it safe.
    • Work towards the promotion of the trust fund.
    • A look at the trust’s administration, for example.
  • Accounts and Inspection: The trustees are require to keep appropriate books of accounts of all the trust’s assets, obligations, income, and expenses and to have the reports examined by a ‘chartered accountant.
  • Closing: The assets of the trust should not be handed to the trustees at the closing of the trust. They will be transferred to any other similar trust or organisation with the same objectives as this trust. It should be done with the consent of the charity commissioner, the Court, or any other legislation that is applicable at the time.

The objective of Tax Relief for Trusts

Giving benefits to religious trusts is primarily intended to support their social welfare and religious convictions. This is why exemptions have also been related to the accomplishment of such reasons. The Trusts must pay taxes on any receipts that are not use for the stated objectives.

Income of a Religious Trust

For the purpose of calculating overall income of the Trust, any payments receive by the Trust as revenue receipts from its assets, whether movable or immovable, are considered income of the Trust. As a result, all gifts, voluntary contributions, interest, dividends, income from property (rent), revenue obtained through trust operations, and so on are regarded income in the hands of the trust (Section 12). Voluntary gifts with the express intention of becoming part of the trust’s corpus, on the other hand, are capital receipts and hence are not included in the trust’s total revenue.

If a trust loses its exemption under Section 11 of the Act due to noncompliance with the registration restrictions or other circumstances as in Section 13, the corpus gift receive will be considered income and tax will be paid on it. Furthermore, money received by trust that is includible in the hands of any other person for tax reasons is not include in the trust’s income. For example, if property is established in trust but the settlement is by revocable transfer, the income derived from such property is taxable in the hands of the settler (trustee) rather than the trust under section 61 of the Act.

Concept of Corpus Donations while calculating Income of a Religious Trust

The term “Corpus” refers to a trust’s capital. The corpus of a trust is any quantity that represents its capital. The corpus may contain capital funds, under whatever name they are of; such as the Building Fund, as well as monies for the trust’s capital spending. Any contribution made for a capital purpose or with the directive that the donation is maintained intact and only the income gained on the investment of such donation is use for the trust’s goals will be considered a donation to the trust’s corpus.

To verify that a contribution is for the corpus of a trust; receive a particular letter from the donor or collect the donor’s signature in receipt saying that this donation will form part of the corpus fund for a specified purpose or object of the trust. The trust should declare that it is a contribution to the trust’s corpus, and entries in books of account should be correctly passed to credit the amount to the Trust Fund or another fund for capital objectives.

Any income that-

  • Is use for non-charitable or religious reasons, or ceases to be accumulate or laid aside,
  • No longer remains deposited in any defined shape or style,
  • Not use for the purpose for which it was accumulate or put aside; or paid/credited to any other trust or institution registered under section 12 A B or institution referred to in section 10(23) (C); shall be regarded to be the trust’s income and subject to tax.

However, if the circumstances are beyond the trust’s control; the assessing officer may enable the trust to employ such income for other charitable or religious purposes that are consistent with the trust’s aims.

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All legal arrangements regulating the Charity Institution will be contingent on the; creation of a business group in which the religious charities will operate. To begin, there is no comprehensive Central law for the legal integration of ‘non-profit organisations,’ which applies to trusts; registered societies, and Section 8 of the Company Act, 2013. Any business income received by the trust is taxable; and the benefit of section 11 does not apply to such income. However, if the activity takes place by the trust is incidental to the achievement of the trust’s aim and separate books of accounts are under the trust in respect of such business; this advantage of exemption under section 11 is available.

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CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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