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Charitable Trust Planning

Charitable Trust Planning

Charitable trusts are the institutions incorporated to advance help and support to the person who really belongs to the poor and deprived category. Trust so formed is purely independent and a non-profit entity as the main aim of formation of trust is to cause public benefit. These institutions are formally incorporated as any other company or association and have its own individual legal identity as a legal person.

The Government has established a variety of tax incentives to encourage charitable Trust & Other Institutions giving by providing exemption u/s 11, 12& 10(23C) of Income Tax Act 1961.

Earlier registration of Trust under section 12AA and approval to take donation u/s 80G was available for Life Time; once the registration is granted subject to fulfillment of conditions. But from the Financial Year 2020-21; Application for taking Trust Registration needs to be done between 1st October 2020 & 31st December 2020.

Application u/s 10(23C), 12AB, 35, 80G for registration/provisional registration/intimation/approval/provisional approval of Trusts/institutions/Research Associations etc. has been extended to 31st March, 2022.

Not all charitable vehicles are treated the same way for tax purposes, so it is important to educate yourself and develop a working relationship with financial and legal professionals.

FREQUENTLY ASKED QUESTIONS

Q.1. What is a Charitable Trust, and why should I set one up?

A Charitable Trust is a legal entity established to manage and distribute funds for charitable purposes, providing benefits like tax exemptions and enhanced credibility for the cause.

Key points:

  • Tax Benefits: Donations to charitable trusts are eligible for tax deductions under Section 80G of the Income Tax Act.
  • Social Impact: It allows you to make a significant impact on social causes.
  • Credibility: Establishing a trust provides your cause with official recognition and improves fundraising opportunities.
  • Legal Protections: A charitable trust is governed by the Indian Trusts Act, 1882 and must be compliant with regulations.

Establishing a charitable trust involves specific legal procedures, including documentation and registration.

Key points:

  • Trust Deed: A legal document defining the objectives, rules, and administration of the trust.
  • Registration: Registration of the trust with the local Registrar of Trusts is mandatory.
  • Trustees: At least two trustees must be appointed. They are responsible for managing and administering the trust’s affairs.
  • Purpose: The trust must have a charitable objective, such as education, healthcare, relief of poverty, etc.
  • Compliance: Charitable trusts must maintain books of accounts and file annual returns to ensure transparency and regulatory compliance.

Charitable trusts enjoy tax exemptions if they meet specific criteria under Indian tax laws.

Key points:

  • Section 12A Registration: A trust must be registered under Section 12A of the Income Tax Act to avail of tax exemptions.
  • Section 80G: Donations to the trust can be claimed as deductions by the donor under Section 80G of the Income Tax Act.
  • Income Tax Exemption: Income derived from property held under trust for charitable purposes is exempt from taxation under Section 11 of the Income Tax Act.
  • Filing Compliance: The trust must file ITR-7 to maintain its tax-exempt status and comply with annual reporting requirements.

Trustees play a crucial role in managing the affairs of the charitable trust, ensuring its transparency, and maintaining compliance with legal and financial regulations.

Key points:

  • Management: Trustees are responsible for the day-to-day administration of the trust and executing the objectives stated in the trust deed.
  • Financial Management: Trustees must maintain proper books of accounts and financial records.
  • Tax Filing: Trustees must ensure the trust files annual returns with the Income Tax Department to maintain its compliance and tax-exempt status.
  • Audit Requirements: Depending on the turnover, the trust may be required to undergo an audit by a qualified Chartered Accountant.

A Chartered Accountant (CA) plays an essential role in guiding you through the financial, legal, and compliance aspects of setting up and managing a charitable trust.

Key points:

  • Trust Deed Drafting: A CA can help draft a legally sound and comprehensive trust deed that aligns with your charitable goals.
  • Tax Planning: A CA ensures that your trust meets the requirements for tax exemptions and helps you avail of the maximum deductions available.
  • Compliance and Filing: A CA will handle the necessary filings and paperwork, including registration under Section 12A and annual ITR-7 filings, ensuring the trust remains in good standing.
  • Audit and Financial Transparency: The CA ensures proper auditing, maintains transparency in financial records, and advises on the best practices for managing donations and assets.