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February 24, 2021

Important Changes In The Income Tax Act For Charitable Trusts

IMPORTANT CHANGES IN THE INCOME TAX ACT FOR CHARITABLE TRUSTS

Following CHANGES have been PROPOSED IN THE FINANCE BILL 2021 (UNION BUDGET) FOR CHARITABLE TRUSTS EFFECTIVE FROM 1st APRIL, 2021.

➡️ Charitable Trusts accept donations as “Corpus Donations” which are not considered as an income and hence there is no obligation to spend (application of income) for the objects of the trust in order to claim this donation as exempt.

Under the proposed amendments all donations claimed as exempt “Corpus Donation” will have to be invested in the investments specified u/s 11(5) of Income Tax Act. If the said “Corpus Donation” is not invested in the investments specified U/s. 11(5) then the “Corpus Donation” shall not be considered as an exempt income.

➡️ Under the proposed amendments once a donation is claimed to be a “Corpus Donation” any amount spent (application of income) for the objects of the trust from this funds will not be allowed as an application of income. This Corpus Donation is taxable hence there is tax liability on Trust.

➡️ Under the proposed amendments when Trust deposits back or invests back in the investment specified U/s 11(5), such amount invested back shall be considered as amount spent (application of income). Tax paid in earlier years on such corpus donation is not refunded back.

➡️ When trust had spent (application of income) more than income for the year, the “excess application of income” was allowed as carry forward to set off against income of subsequent years. Under the proposed amendments trust cannot set off such “excess application of income” or deficit of current year against the income of any subsequent years. Moreover all the present deficits which are carried forward from earlier years shall lapse.

➡️ When the trust spends borrowed funds for its objects of the trust, trusts claimed the said expenses as amounts spent (application of income) and when this borrowed funds were repaid then once again the repayment was also trust claimed as amount spent (application of income).

Under proposed amendment when amounts are spent for the objects of the trust from borrowed fund, Trust cannot claim the same as amount spent (application of income). When trust repays the borrowed fund the trust can claim such repayment of loan as amount spent (application of income) to the extent repayment of borrowed fund made.

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