2. Assessment of Charitable and Religious Trusts

Income of a public charitable or religious trust is governed by Sections 11, 12, 12A, 12AB, and 13 of the Income Tax Act. If a trust satisfies the statutory conditions of registration, accounting, and application of funds, its income is exempt from income tax.

A. Definition of "Charitable Purpose" (Section 2(15)) and the Commercial Proviso

Under Section 2(15), charitable purpose includes:

1. Relief of the poor;
2. Education;
3. Yoga (inserted by Finance Act 2015);
4. Medical relief;
5. Preservation of environment (including watersheds, forests, and wildlife);
6. Preservation of monuments or places or objects of artistic or historic interest; and
7. The advancement of any other Object of General Public Utility (GPU).

B. Mandatory Registration under Section 12AB

With effect from 1st April 2021, all charitable trusts must obtain registration under the electronic regime of Section 12AB:

• Provisional Registration: Granted to newly established trusts for a period of 3 years without an in-depth audit of past activities. Application is made in Form 10A at least one month prior to the commencement of the previous year.
• Final / Regular Registration: Granted for a period of 5 years after verification of activities. Existing trusts or provisional trusts must apply in Form 10AB at least six months prior to expiry of provisional registration or within six months of commencing activities.
• Audit Mandate: Accounts must be audited by a Chartered Accountant in Form 10B / 10BB where total income before Section 11 exemption exceeds the maximum basic exemption limit.

C. Statutory Scheme of Income Exemption (Section 11)

The 85% Application Rule and Permissible Accumulation Scheme

1. Mandatory 85% Application: At least 85% of the gross income of the trust must be applied to charitable or religious purposes in India during the previous year. Both revenue expenditures and capital expenditures (e.g., constructing a school building or purchasing hospital machinery) qualify as valid application!

D. Forfeiture of Exemption under Section 13

Exemption under Section 11 and 12 is completely denied under Section 13 in the following circumstances:

• Private Religious Trusts: Entire income of any trust created for private religious purposes which does not enure to the benefit of the public (Section 13(1)(a)).
• Caste or Communal Trusts: Any trust created for the benefit of any particular religious community or caste (Section 13(1)(b)). (Exception: Scheduled Castes, Scheduled Tribes, backward classes, women and children).
• Benefit to Specified Persons (Section 13(1)(c)): If any part of income or property is used directly or indirectly for the benefit of the author, founder, substantial contributor (> ₹50,000), trustees, or their relatives (Section 13(3)).
• Violation of Section 11(5) Investment Modes: If any trust funds are invested in non-approved modes (shares in private companies, chit funds, loans to individuals).

E. Special Taxes on Trusts: Section 115BBI and Section 115TD

• Section 115BBI (Tax on Specified Income): Levies a flat tax of 30% (plus surcharge and cess) on specified violations: income accumulated u/s 11(2) not used within 5 years, funds invested in prohibited modes u/s 13(1)(d), or income diverted for personal benefit u/s 13(1)(c).
• Section 115TD (Accreted Income / Exit Tax): Where a registered charitable trust converts into any form not eligible for registration, merges with a non-charitable entity, or fails to transfer its assets upon dissolution to another registered trust within 12 months, it is liable to pay tax on the Net Accreted Income (Fair Market Value of assets minus liabilities) at the Maximum Marginal Rate (30% + 12% surcharge + 4% cess = 34.944%).

3. Assessment of Non-Resident Indians (NRIs) and Foreign Entities

Under Section 5(2) of the Income Tax Act, the total income of a non-resident includes all income from whatever source derived which:

1. Is received or is deemed to be received in India in such year by or on behalf of such person; or
2. Accrues or arises or is deemed to accrue or arise to him in India during such year (Section 9).

A. Incomes Completely Exempt in the Hands of Non-Residents

• Interest on NRE Account (Section 10(4)(ii)): Any income by way of interest on moneys standing to the credit of an individual in a Non-Resident (External) Account in any bank in India is completely exempt from income tax, provided the person is a person resident outside India under FEMA.
• Interest on FCNR Accounts: Interest on Foreign Currency Non-Resident accounts is fully exempt for Non-Residents and Not Ordinarily Residents (RNOR) u/s 10(15)(iv)(fa).
• Section 10(4)(i): Interest on notified Government securities and bonds purchased with foreign currency.
• Section 10(6): Remuneration received by foreign diplomats, consular officers, and foreign trade commissioners.

B. Determination of Income under Rule 10

Where the Assessing Officer (AO) is of the opinion that the actual amount of profits and gains accruing or arising directly or indirectly to a non-resident person through or from any business connection in India cannot be definitely ascertained, the AO may compute the taxable income under Rule 10 of the Income Tax Rules, 1962 using any of the following three methods:

C. Special Presumptive Taxation Schemes for Non-Residents

To simplify tax administration and prevent complex transfer pricing disputes, Chapter XII-B of the Act contains specific presumptive taxation codes for non-residents engaged in specialized cross-border businesses:

D. Taxation of Royalty, Fees for Technical Services (FTS) & NRI Insurance

• Royalty and FTS (Section 115A): Non-residents and foreign companies receiving income by way of Royalty or Fees for Technical Services (FTS) from an Indian concern or Government are taxed at a flat rate of 20% (increased from 10% by Finance Act 2023) on gross receipts without any expenditure deduction.
• Non-Resident Insurance Business (Section 44): The profits of an insurance business carried on by a non-resident in India are computed in accordance with the First Schedule to the Act. In life insurance, profits are determined based on actuarial valuation; in general insurance, profits are based on the audited annual accounts submitted to IRDAI.

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