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Section 11 of the Income Tax Act: A Detailed Overview of the Exemption

Updated: May 20


Section 11 of the Income Tax Act: A Detailed Overview of the Exemption

If the activity is incidental to achieving the goals established by the trust or institution and separate books of account are kept by the specific trust or institution for the business, income received from a charitable or religious trust will be exempt from taxes under Section 11. This article examines a few of the most significant exemptions allowed by Section 11 of the Income Tax Act. Let us discuss these in detail.

 

Table of Contents

What is Section 11 of the Income Tax Act?

 

What is Section 11 of the Income Tax Act?

Income earned from property held under trust or institutions exclusively for charity or religious purposes is free from income tax under Section 11 of the Income Tax Act, as long as the money is used for such purposes in India. The Act specifies specific terms and restrictions that apply to the exemption. Only registered trusts or organisations that have received a certificate of registration under Section 12A or Section 12AA of the Act from the Income Tax Department are eligible for the exemption. The income that can be claimed as an exemption under this section includes:

  • Income accrued or applied to such uses in India, to the extent of 15% of the income from such property

  • Income received from property held under trust that is used exclusively for charity or religious purposes

  • The trust should only get donations that are given voluntarily

  • Capital gains from the transfer of a capital asset held in an institution or trust to the degree that the net consideration is invested or deposited within the allotted time frame in certain ways 

Some examples of exemptions under Section 11 include humanitarian hospitals managed by individuals or charitable trusts, societies operating universities and institutions to spread knowledge to the general public, and organisations giving money to schools, colleges, or any other type of educational institution. 


Conditions to Claim Exemption under Section 11

  • Donations made by people to these organisations must be used for the purposes specified in Section 12 of the Act. 

  • Trusts must abide by the provisions found in Sections 11(5) and 13(1) of the Act with regard to the form and manner of fund deposits and investments. 

  • Institutions or trusts cannot be established to benefit a specific religious caste or community. 

  • Income cannot be used to benefit the settler directly or indirectly.

  • The income or property of such institutions cannot be applied for the direct or indirect benefit of any person defined under Section 13(3). They consist of the creator, manager, trustee, writer, family member, etc. of the organisation. 

Under Section 11, income used by nonprofit organisations to advance global welfare is likewise excluded. But there are specific requirements related to this instance as well. They are as follows: 

  • The trust's income used for charitable or religious purposes outside of India is eligible if it was established before April 1, 1952. 

  • If the organisation was founded on or after April 1, 1952, deductions will be allowed for income used to support global humanitarian initiatives, of which India is a member. 


Section 11(2) of the Income Tax Act

The accumulation of income by trusts and charity institutions is covered under Section 11(2). Up to 15% of their income may be kept by them if it is not used for charitable purposes during the year it is earned. They can keep this money as their corpus of capital for the following five years and are not required to utilise it for charitable reasons in the near future. Institutions now have five years to use accumulations of more than 15%. Nevertheless, in the following circumstances, this sum will not be included in the institution's overall revenue:

  • Institutions use the modes of investment outlined in Section 11(5). 

  • If, at least two months prior to the deadline for filing IT returns, they send Form No. 10, a notice to the assessing officer advising of income accumulation by a charity trust. 

  • If the income has been set aside because of a court order or injunction, entities must state why the funds are set aside. 


Section 11(3) of the Income Tax Act

Charitable and religious trusts receive a great deal of protection under Section 11(3), which spares them from paying taxes on revenue derived from their properties. This exemption helps trusts fulfil their religious or philanthropic goals and permits them to use their income for the benefit of society. A trust may lose its tax-exempt status and be required to pay tax on its revenue if it violates the guidelines outlined in Section 11(3).


Section 11(4) of the Income Tax Act

When properties under charity institutions are used for business endeavours, Section 11(4) is applicable. It specifies that the Assessing Officer will have the authority to evaluate the business's income in accordance with the Act's rules and determine whether it surpasses the income as indicated in its accounts when evaluating the claim that the business's income must not be included in the trust's total income. Furthermore, the Officer will presume that the institution will put the excess money to use for things other than philanthropic or religious endeavours. 


Section 11(5) Of Income Tax Act

The IT Act's Section 11(5) addresses the investment options listed in Section 11: 

  • Investments in a moveable property (excluding equipment and plants)

  • Investments in the manner specified in Section 2 Clause (c) of the Government Savings Certificates Act, 1959 (46 of 1959), and other securities or certificates issued by the Central Government under those Government's Small Savings Schemes

  • Shares of public companies are subject to the mentioned requirements

  • Deposits with a cooperative society that conducts banking, such as a cooperative land development bank or a cooperative land mortgage bank

  • Funds kept in bank accounts at Post Office Saving

  • UTI investments

  • Section 36(1)(viii) allows deductions for securities issued by financial corporations engaged in long-term industrial financing in India

  • Deposits or investments in any bonds issued by a publicly traded corporation established and registered in India whose primary activity is the provision of long-term financing for India's urban infrastructure

  • Debentures issued by firms for whom the principal and interest amount are guaranteed by the Central Government

  • Units of the National Skill Development Centre mutual funds and shares

  • Funds held at the Indian Industrial Development Bank

  • Additional investment options recommended by the Central Government


Tax Treatment of Voluntary Donations

As you go through the explanation of Section 11 of the Income Tax Act, you may encounter voluntary donations that qualify for a tax exemption. There are two types of voluntary donations or contributions that charity trusts or institutions may receive. These are the following: 

  • A corpus fund donation is the sum that these trusts receive with the intention of putting it into the organization's capital fund. The provisions of Section 11(1)(d) do not apply to such donations. Because of this, even if the institution does not use the money, it will still be eligible for the exemption.

  • The money that nonprofit organisations get on their own is essentially donations made voluntarily. This money is automatically included in the trust's income. Because of this, the organisation may only be excluded from paying for things if it uses them for charitable or religious purposes. 


Conclusion

The Income Tax Act's Section 11 exempts revenue received by nonprofit or religious organisations. This clause offers tax breaks to charitable organisations in an effort to encourage charitable giving throughout the nation. In order to receive the exemption, the organisation needs to meet a few requirements. To stay out of trouble with the law, charitable or religious organisations must keep accurate books of accounts and complete their income tax reports on time. Charitable or religious organisations can use their resources for the benefit of society without worrying about tax liabilities by making use of the exemption under Section 11.


FAQ

Q1. What is the purpose of exemption under Section 11?

By giving such organisations a tax exemption, Section 11 exemptions are meant to encourage and support philanthropic and religious endeavours.


Q2. How can an institution or trust apply for exemption under Section 11?

A trust or organisation must submit Form 10A to the Income Tax Department in order to request an exemption under Section 11.


Q3. What are the eligibility conditions that a trust or institution must meet to claim an exemption under Section 11?

A trust or institution must be formed under Section 12A of the Income Tax Act and have its revenue used exclusively for charity or religious purposes in order to qualify for exemption under Section 11.


Q4. What is the duration of exemption under Section 11?

As long as the trust or institution satisfies the requirements of Section 11, it will always be exempt from paying taxes under Section 11.


Q5. Is there any limit on the exemption amount that can be claimed under Section 11?

No, the total amount of exemption that may be claimed under Section 11 is not limited. But the money can only be utilised for religious or charitable endeavours.


Q6. What is an exemption under Section 11(1A)? 

Up to 15% of the revenue from properties held by trusts or organisations engaged in charity or religious endeavours is free from taxes under Section 11(1A). 


Q7. What is section 12A of the Income Tax Act?

A trust or institution must register to claim an exemption under Section 11 of the Income Tax Act of 1961, according to Section 12A of the Income Tax Act. It considers an institution or trust to be a qualified entity for registration.


Q8. What is section 12AA of the Income Tax Act?

The process for registering trusts and institutions that qualify for exemption under Sections 11 and 12 of the Income Tax Act, 1961 is outlined in Section 12AA of the Act. It requires all trusts and organisations seeking exemptions under Sections 11 or 12 to register with the Income Tax Department.


Q9. What is section 13 of the Income Tax Act?

The provisions pertaining to income from property kept for charity or religious purposes are covered by Section 13 of the Income Tax Act of 1961. It states that any income received from property held in trust that is used exclusively for charitable or religious purposes cannot be deducted from the recipient's total income for the previous year.


Q10. What is section 10(11) of the Income Tax Act?

Section 10 of the Income Tax Act was created to lessen the effects of tax structures like rent allowances, child education expenses, travel allowances, gratuities, and so on. Under Section 10(11), individuals are qualified for a withdrawal exemption from the Provident Fund (PF).


Q11. Is depreciation allowed under section 11?

Yes, you may use this section to deduct any and all expenses, including depreciation. However, depreciation is prohibited under this clause if the acquisition of the asset was recognised as an application of income in the year prior.


Q12. What are the conditions for charitable trust exemption?

A charity trust may deduct 15% of its net revenue from properties used for charitable or religious purposes under Section 11. Furthermore, the money they get must come from donations made voluntarily. 


Q13. What are the investment modes under Section 11(5)?

Among the investment options covered by Section 11(5) of the Act are deposits in Central Government securities, P.O. Savings Accounts, UTI units, and shares of public sector corporations.  




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