The income of certain funds, trusts, institutions, universities, hospitals etc. referred to in section 10(23C)(iv)-(via) of the Income Tax Act, 1961 (the “first regime”) and trusts/institutions registered under section 12AA/12AB (the “second regime”) is exempt from tax subject to fulfilling certain conditions.
One key condition is that at least 85% of the income must be applied during the year for charitable/religious purposes by the trust/institution itself. Trusts/institutions are allowed to apply this mandatory 85% either directly or by donating to other trusts with similar objectives. However, if donating to another trust/institution, the donation cannot be towards the recipient’s corpus to ensure it is applied for charitable/religious purposes.
The Finance Act 2023 amended the Income Tax Act to provide that eligible donations made by one trust/institution to another will be treated as application towards charitable/religious purposes only to the extent of 85% of the donation amount. This is to ensure the intended application of the full 85% towards charitable/religious purposes when trusts/institutions donate between themselves rather than to their corpus.
This raised concerns whether the remaining 15% of the donation amount would become taxable or eligible for accumulation, since the funds have already been disbursed by the donor.
To address these concerns, the Central Board of Direct Taxes (CBDT) has issued Circular 3/2024 dated 06.03.2024 to clarify the interpretation of the Finance Act 2023 amendments.
The circular provides clarity on how an eligible trust/institution should compute the application of its income and claim exemption under section 10(23C) or section 11, in relation to donations made to other trusts/institutions.
CBDT Income Tax Circular 3/2024 dated 06/03/2024: Clarification regarding tax exemption for trusts/institutions on donations