Charitable Budget for Charities

Contrary to our fears and expectations, the Union Budget and Finance Bill 2025 has been charitable towards charitable trusts and institutions and as avowed in the Memorandum explaining the provisions in the Bill, tried to remove difficulties faced by assesses and attempted to rationalize various provisions of the Income tax Act, pertaining to tax exemptions and deductions.

Summary of the rationalization of the provisions relating to charitable trusts and institutions

Extension of validity

Existing provision: Under the present provisions of section 12AB of the Income Tax Act, 1961, registration for tax exemption is valid for a period of five years or three years in case of a new trust or institution where provisional registration is given and where activities of the trust or institution have not commenced.

The change: The period of validity of registration of a trust or institution with income below Rs. Five Crore has been increased from five years to ten years.

The amended provision will be a boon to small trusts or institution whose total income does not exceed Rs. Five crores in each of the two previous years, preceding the previous year in which application is made.

However, this will not apply to provisional registration of new trusts, where registration is granted for three years.

Also, it seems that small trusts whose approval is valid till March 31, 2026, may still have to apply for renewal by September 30, 2025, but the renewal granted to them will then be for ten years.

Specified violations

Existing provision: Under the present provisions of the Act, an ‘incomplete’ application for registration is treated as ‘specified violation.’ This could result in cancellation of registration and consequently, the trust or institution could be faced with the prospects of accreted or an exit tax being levied based on fair market value of the assets.

The change: In order to prevent such harsh penalties for filing incomplete application, amendment has been made to give the trust or institution the opportunity to complete the application and the same to be considered for the purposes of registration.

In other words, applications which were either incomplete or with false information were grounds for rejection by Income Tax Officers. Now, application shall not be rejected on the basis of incomplete information, although rejection shall continue in case of false information.

Thus, the ‘incomplete application’ clause has been removed as grounds for rejection.

Specified person

Existing provision: Under section 13(3) of the Income tax Act, if any income of a trust or institution is applied for the benefit of a ‘specified person’ (other than founder, author or trustee, member or manager), or his relative or the concern in which he has substantial interest, such income shall not be exempted under section 11 and 12 of the Income Tax Act, 1961.

Under the present provisions of the Act, ‘specified persons’ also include a person who has contributed an amount of Rs 50,000.00 in aggregate, i.e., up to the end of the previous year, to the trust.

Thus, the existing provision had a single threshold of Rs. 50,000.00 and only considered aggregate contributions up to the end of relevant previous year. Any person (donor) crossing this limit was considered a substantial contributor.

The change: The threshold limit for considering a contribution as ‘substantial contribution’ to the trust or institution has been changed from total contribution exceeding fifty thousand rupees up to the end of the relevant previous year to one lakh rupees during the relevant previous year, or exceeding ten lakh rupees in aggregate up to the end of the relevant previous year.

The amendment, as above, shall be applicable to person other than author, founder, trustee, member or manager of the trust.

Thus, under the Amendment, if any income of a trust or institution is applied for the benefit of a ‘specified person’, i.e., a person who contributes more than one lakh rupees during the relevant previous year, or exceeding ten lakh rupees in aggregate up to the end of the relevant previous year, such income shall not be exempted under section 11 and 12 of the Income Tax Act, 1961.