Section 11 of Income Tax Act: Exemption for Charitable Trusts Explained

Section 11 of the Income Tax Act, 1961, was enacted to promote social work in India. This section provides tax exemptions to charitable and religious organizations. This exemption is available on income earned from property held for charitable or religious purposes. However, certain conditions must be met, such as registration, proper use of funds, and timely audits.

Budget 2025 update

The Budget proposes a change to the Explanation to subsection (4) of Section 12AB. Under this, incomplete application for registration of a trust or institution will not be considered a specified violation under this subsection.

What Does Section 11 of the Income Tax Act Mean?

Section 11 of the Income Tax Act exempts income from property owned by charitable trusts and institutions from tax. To qualify for this exemption, the income must be entirely derived from religious or charitable purposes. The organization must also have a registration certificate under Section 12A or Section 12AA of the Income Tax Act. The organization’s financial records are required to be audited by a qualified Chartered Accountant (CA). In addition, both the audit report and the income tax return should be submitted before the prescribed due date.

Apart from this, some other conditions also come up, which have to be fulfilled:

• Whatever donations people make to these institutions, their purpose should fall within the scope of Section 12 of the Act.
• The trusts shall comply with the conditions of Section 11(5) and Section 13(1) of the Act in respect of the manner of collection and investment of funds.
• The founder or settlor must not directly or indirectly benefit personally from the earnings of the entity.
• These trusts or institutions should not be created for the benefit of any particular religious caste or community.
• The income or property of such institutions must not be used for the direct or indirect benefit of any person specified in Section 13(3), including the founder, manager, trustee, author, or their relatives.

What are the eligibility requirements for charitable institutions engaged in promoting international welfare under Section 11?

If the trust was formed before April 1, 1952, income used for charitable or religious purposes outside India will also be exempt.

But if the organisation is formed on or after April 1, 1952, then tax exemption will be available only on the income used for promoting welfare activities across the world, provided India is a part of that activity.

Tax Exemption Under Section 11 of the Income Tax Act

Here is a list of income that is tax-free under Section 11 of the Income Tax Act:

• Income from property of organizations engaged in religious or charitable work.
• Up to 15% of the total revenue earned or received by the Trust from such activities in the previous financial year.
• Funds received by charitable institutions or trusts should be in the form of voluntary contributions with a clear indication that the money will form part of the corpus of the trust.
• Capital gains arising from the transfer of a capital asset to a trust are also exempt, provided the proceeds are used to purchase a new capital asset solely for charitable or religious purposes. In such cases, the entire capital gain will be considered used for charitable purposes.

Section 11(2) of Income Tax Act

This section deals with the accumulation of earnings by charitable institutions and trusts. Trusts can retain up to 15% of their earnings without spending them on charitable purposes that year. They are not required to utilize this amount immediately for charitable activities in the following years. They can retain it as their capital for the next five years.

Essentially, organizations are now required to use any savings above 15% within the next five years. However, this amount will not be included in the organization's total earnings in the following cases:

• If the institutions invest the funds in the manner specified under Section 11(5).
• If they submit Form No. 10. This form is for providing information to the assessing officer about the retained earnings of the trust, which is required to be submitted at least two months before the last date for filing the Income Tax Return.
• Institutions should clearly state the purpose for which the funds are being set aside.
• If this income has been set aside due to any court order or stay.

Section 11(4) Of Income Tax Act

This section applies when the charitable organization's property includes a business or trade. If the organization claims that the income from the business should not be included in the trust's total income, the assessing officer has the power to examine the income from the business in accordance with the provisions of the Act to determine whether the actual income exceeds the income shown in the accounts.

Furthermore, the officer will presume that the organization has used this additional amount for purposes other than religious or charitable purposes.

Section 11(5) Of Income Tax Act

Section 11(5) of the Income Tax Act states the modes of investment that are permissible under Section 11:

• Investment in immovable property, excluding machinery and plant.
• Investment in certificates falling under clause (c) of section 2 of the Government Savings Certificates Act, 1959 and securities or certificates issued under the small savings schemes of the Central Government.
• Other savings certificates and securities issued by the Central Government.
• Shares of public sector companies falling under the prescribed conditions.
• Deposits in a scheduled bank or a co-operative society engaged in banking business (including a co-operative land mortgage bank or a co-operative land development bank).
• Deposits held in a Post Office Savings Bank Account
• Investment in UTI units.
• Securities issued by financial corporations engaged in long-term industrial financing in India, which are eligible for deduction under Section 36(1)(viii).
• Deposits or investments in bonds of a public company registered and formed with the primary objective of providing long-term finance for urban infrastructure in India.
• Debentures issued by or on behalf of companies, the principal amount and interest of which are guaranteed by the Central Government.
• Shares and mutual fund units of National Skill Development Centre.
• Deposits in Industrial Development Bank of India (IDBI).
• Other modes of investment as may be determined by the Central Government.

Example Of Section 11 Of Income Tax Act

Let us look at some real-life examples to understand the rules of Section 11 better:

• Charitable trusts or people running hospitals out of charity or humanity.
• Societies running schools and colleges to provide education to the common people.
• Institutions that provide financial assistance to colleges, schools or other educational institutions.

Below is a comparison of the sections of the Income Tax Act 1961 and the Income Tax Act 2025:

Income Tax Act 1961	Income Tax Act 2025
Section 11	Section 334-343
Section 11(2)	Section 342
Section 11 (4)	Section 344
Section 12	Section 332

FAQs

What is Section 11(1A) of Income Tax Act?

This section deals with the transfer of capital assets held by trusts wholly or partially for religious or charitable purposes. In fact, when such assets are sold or transferred, the rules for tax exemption on the resulting gains are determined under this section.

What is the exemption limit for trust?

Trusts engaged in religious or charitable work are allowed to save 15% of their property income. This 15% can be claimed as a deduction under Section 11 of the Income Tax Act. The remaining 85% must be spent on social welfare activities within the same year.

What is exemption under Section 11(1A)?

This section provides tax exemption to trusts or organizations engaged in religious or charitable activities. This exemption applies to up to 15% of their property income. Most people avoid tax on their trusts by staying within this legal framework.

Is donation received by trust taxable?

Donations received for religious purposes are completely tax-free. However, it's important to understand one thing: anonymous donations to medical or educational institutions, or anonymous contributions other than religious donations, are taxable under Section 115BBC. In such cases, tax is levied on 5% of the total donation or ₹100,000, whichever is greater.

What are the conditions for charitable trust exemption?

Charitable trusts can claim a deduction under Section 11 on 15% of their total property income. Furthermore, a key requirement is that the funds received by the organization must be voluntary contributions from the public. This is a major mistake many trusts make during accounting, which can lead to their claims being rejected.