Introduction:

To strengthen the efforts of religious charities, the Government of India provides various tax exemptions under Section 11 of the Income Tax Act but these exemptions are conditional on specific types of income, and the organizations have to meet certain conditions to be eligible to apply

The Government of India offers substantial tax deductions on income derived from property held for religious or charitable purposes. Individuals eligible to claim these deductions must have a good understanding of Section 11. This article clarifies the specific circumstances under which this tax break can be applied.

Section 11:

Section 11 of the Taxation Act provides a tax exemption for income from property held by charities and institutions. To qualify for this exemption, income must only come from property donated for religious and charitable purposes, and organizations must have certificates of registration under Section 12A or Section 12AA of the ICT Act in Also, books, audit reports and income tax returns must be maintained by a certified accountant by due dates.

Exemption Under Section 11:

• Below are the amounts exempted from tax under Section 11 of the Tax Act:
• up to 15% of the income earned or derived by the trust during the previous financial year from such activities.
• Charities or trusts must have funds in the form of voluntary donations, with clear instructions that they must be part of the team of the trust or foundation.
• Capital gains realized by trusts from the transfer of capital assets are considered to be wholly applied for charitable or religious purposes when the net consideration amount is utilized to acquire a new capital asset held under trust for such purposes.
• Income derived by institutions from properties engaged in religious or charitable activities.

Key features of the section 11:

• The Income Tax Act, 1961 has a variety of exemptions. As per Section 11, the following conditions must be met to be eligible for an exemption:
• Income must be derived from assets held either wholly or partially in trust (for properties owned partially, the exemption is only applicable if the non-profit organization was established before the tax year in question) for religious or charitable purposes in India.
• The total amount allocated or reserved for charitable or religious purposes should not exceed 15% of the previous year’s income or receipts.
• The property must be exclusively designated for charitable purposes.
• A charity should not be formed with the intention of providing superior assistance to any particular religious group or family.
• The trust funds must be allocated or utilized according to the formats and modalities specified in section 11(5).
• A trust must be set up to meet legal requirements.
• Registration under Section 12A of the Income Tax Act is essential for the trust or institution to qualify for tax exemption on its income.
• The aforementioned income should be utilized or accumulated in India for these designated purposes.
• The income-generating property should be registered under a charitable or religious trust.
• No portion of the proceeds from such charitable organizations or establishments should be used for the benefit of the settlor or any other designated individuals, either directly or indirectly.
• A trust must distribute at least 85% of its income for the fiscal year for the purposes of the trust or foundation. This means that at least 85% of the trust’s income must go to charity, with no more than 15% saved or invested for future use
• The trust or corporation must file its income tax returns by the deadline under the Tax Act.
• Any donations or contributions received by the trust should be exclusively utilized for charitable purposes and not diverted for any other use.

Section 11(2) :

• Section 11(2) deals with collections by charities and trusts. They are allowed to keep up to 15% of their income during the generation year without immediately using it for charity. There is no obligation to give this money to charity in subsequent years, as it can be kept as a capital corpus for five years
• Organizations are now required to use a maximum of 15% of reserves over the next 5 years. However, this amount is not counted as part of the organization’s total income in the following statements.
• If they submit Form No. 10, a notice to the assessing officer informing about income accumulation by a charitable trust, at least two months before the due date for filing IT returns.

Section 11(4):

• Section 11(4) applies when assets under charitable organizations include trading companies. It provides that, in considering a claim that the funds of a business may not be included in the total funds of the trust, the trustee is entitled to treat the income of the business in accordance with the provisions of the Act and to treat it as its funds excess earnings or income reported in its accounts
• In addition, the officer will estimate that the organization will allocate the remaining funds for purposes other than religious or charitable purposes.

Section 11(5) :

• Section 11(5) of the IT Act addresses the modes of investment as prescribed under Section 11:
• Invest in assets specified in clause (c) of section 2 of the Government Savings Certificates Act, 1959, and Central Government-issued securities under Small Savings Schemes. Deposit in a chartered account or affiliated fund, including cooperative land mortgage and development funds.
• Deposits or investments issued by a public company incorporated and registered in India were primarily focused on providing long-term financing for urban infrastructure in the country.

Common errors to avoid in Section11:

• Like any set of rules, common mistakes can occur when adhering to the provisions of Section 11 of the IT Act. Therefore, it’s crucial to be aware of these pitfalls and ensure accuracy when submitting your documents.
• Failure to provide required information as requested on the form may result in rejection.
• Failure to submit the form punctually or within the appropriate timeframe.
• Failure to provide adequate evidence of charitable activities.
• Failure to maintain accurate records can result in significant consequences.
• Finally, it is important to actively maintain all documentation relating to discounts, as this can be invaluable if proof of compliance is later required including a return review of all  returns on a regular basis necessary to detect any discrepancies early.

Conclusion:

After reviewing the information provided regarding Section 11 of the Income Tax Act, taxpayers should evaluate their liabilities. If additional assistance is needed, individuals can also seek guidance from a TaxFilr consultant for further clarification.