CBDT Notifies and Amends Rules Regarding Accumulation of Unspent Income

Central Board of Direct Taxes (CBDT), vide Notification No. 96/2022 (Income Tax) Dated: 17th August, 2022 has amended Income Tax Rule 17 and Form No. 10.

The Notification can be read or downloaded at: https://incometaxindia.gov.in/communications/notification/notification-no-96-2022.pdf

Requirement for tax exemption u/s 11 & 10(23C)

Tax exemption is available under two specific sections – Section 11 and Section 10(23C).

Most charitable trusts and institutions enjoy tax exemption u/s 11 of the Income tax Act after registering u/s 12AA (now 12AB). While the tax exemption available u/s 11 is general and available to all charitable trusts and institutions; Section 10(23C) of the Act is a specific exemption available to certain Government and non-government universities, educational institutions, hospitals and medical institutions.

Tax exemption under both sections is subject to conditions laid down under Income Tax Act and the Rules.

Both types of institutions (i.e., whether registered u/s 12AB or 10(23C) must apply (spend) its income wholly and exclusively for the objects for which it is established and must apply at least eighty-five per cent of the income every year.

Both types of institutions are allowed to retain up to fifteen per cent of total income without any conditions (unrestricted reserves).

What if eighty-five per cent of income cannot be spent?

However, if in any given fiscal year, the institution registered u/s 12AB or 10(23C), as the case maybe, is unable to apply or spend at least eighty-five per cent of its income, the shortfall may either be:

  1. Carried forward to the immediately following financial year by exercising option u/s 11(1) of the Income tax Act 1961 and file online Form 9A or
  2. Accumulate for a period of up to five years by exercising option u/s 11(2) of the Income tax Act 1961 and file online Form 10.

Form 9A may be filed in case of income earned but not received (accrued income) or if received late in the previous financial year.

Both Form 9A and Form 10 must be furnished electronically either under digital signature or electronic verification code before 30th September of the assessment year.

Income tax requires that the accumulated amount must be spent by the institution on its own and it cannot be spent by way of donations (corpus or otherwise) to any other trust or institution registered u/s 12AB or any other institution claiming exemption u/s 10(23C).

The amount so accumulated or set apart has been invested or deposited in any one or more of the forms or modes specified in Section 11(5) of the Income-tax Act, 1961.

Essence of the change

As can be seen, the requirement to spend at least eight-five per cent of the total income applies equally to trusts and institutions registered u/s 12AB and 10(23C). The only difference being that earlier institutions registered u/s 10(23C) were not required to pass a Board Resolution to accumulate the unspent income, nor file any online form for the same, nor specify the purpose of accumulation.

The new online Form No. 10 is now more detailed and applicable besides trusts and institutions registered u/s 12AB, also to trusts and institutions registered u/s 10(23C).

The new Form No. 10 can be studied by clicking on link to the Notification cited earlier.

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