Section 11(3) of the Income Tax Act is an important provision that pertains to the computation of income of a charitable or religious trust. This provision sets out the conditions under which income earned by a trust can be deemed to be applied for charitable or religious purposes and hence, not liable to be taxed.
In this blog, we will delve deeper into the provisions of section 11(3) of the Income Tax Act and understand its implications for charitable and religious trusts.
Applicability of Section 11(3)
Section 11(3) applies to a charitable or religious trust that owns a property from which it derives income. The trust should be registered under Section 12AA of the Income Tax Act and should be constituted for charitable or religious purposes.
Conditions for exemption
In order to claim exemption under section 11(3), the following conditions must be satisfied:
- The income should be applied for charitable or religious purposes: The income earned by the trust should be applied for charitable or religious purposes in India. The trust should not distribute its income to its members or trustees.
- Accumulation of income: The trust can accumulate up to 15% of its income in any financial year for a period of up to 5 years. The accumulated income should be used for charitable or religious purposes in India. If the trust fails to utilize the accumulated income within 5 years, the amount will be added to the income of the trust and taxed accordingly.
- Investment of income: The trust can also invest its income in specified modes of investment such as government securities, units of mutual funds, and specified bonds. The income from these investments should be used for charitable or religious purposes in India.
- Registration: The trust should be registered under Section 12AA of the Income Tax Act. This registration is necessary for claiming exemption under section 11(3).
Implications for Charitable and Religious Trusts
Section 11(3) provides a significant relief to charitable and religious trusts as it exempts them from paying tax on income earned from their properties. This exemption allows trusts to utilize their income for the betterment of society and helps them achieve their charitable or religious objectives.
However, trusts must ensure that they comply with the conditions laid down in section 11(3). Any violation of these conditions can lead to the trust losing its tax-exempt status and being liable to pay tax on its income.
In conclusion
Section 11(3) of the Income Tax Act provides a significant relief to charitable and religious trusts by exempting them from paying tax on income earned from their properties. However, trusts must ensure that they comply with the conditions laid down in the section in order to claim this exemption. By complying with these conditions, trusts can continue to work towards their charitable or religious objectives without the burden of paying taxes on their income.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
Q. What is Section 11(3) of the Income Tax Act?
Section 11(3) of the Income Tax Act pertains to the computation of income of a charitable or religious trust. It lays down the conditions under which the income earned by a trust can be deemed to be applied for charitable or religious purposes and hence, not liable to be taxed.
Q. Who is eligible to claim exemption under Section 11(3)?
Charitable or religious trusts that are registered under Section 12AA of the Income Tax Act and constituted for charitable or religious purposes are eligible to claim exemption under Section 11(3).
Q. What are the conditions for claiming exemption under Section 11(3)?
The conditions for claiming exemption under Section 11(3) are as follows:
The income should be applied for charitable or religious purposes in India
The trust should not distribute its income to its members or trustees
The trust can accumulate up to 15% of its income in any financial year for a period of up to 5 years
The trust can invest its income in specified modes of investment
The trust should be registered under Section 12AA of the Income Tax Act.
Q. What is the maximum amount of income that can be accumulated by a trust?
A trust can accumulate up to 15% of its income in any financial year for a period of up to 5 years.
Q. What happens if the trust fails to utilize the accumulated income within 5 years?
If the trust fails to utilize the accumulated income within 5 years, the amount will be added to the income of the trust and taxed accordingly.
Q. Can the income earned by a trust be invested in any mode of investment?
No, the income earned by a trust can only be invested in specified modes of investment such as government securities, units of mutual funds, and specified bonds.
Q. What are the implications of Section 11(3) for charitable and religious trusts?
Section 11(3) provides significant relief to charitable and religious trusts as it exempts them from paying tax on income earned from their properties. This exemption allows trusts to utilize their income for the betterment of society and helps them achieve their charitable or religious objectives.
Q. What happens if a trust violates the conditions laid down in Section 11(3)?
If a trust violates the conditions laid down in Section 11(3), it can lose its tax-exempt status and become liable to pay tax on its income.
