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section 11 of income tax act
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Section 11 of the Income Tax Act

Every section of the Income Tax Act is important and has its own set of exemptions. Under certain conditions, Section 11 of the Income Tax Act of 1961 exempts income received from property owned by charity trusts and societies for operations carried out for charitable or religious purposes.

Eligibility Criteria for Section 11

Any institution or trust registered under Section 12AA of the Income Tax Act is eligible to claim exemptions under section 11 of the income tax act.

Exemption Amount Under Section 11 of Income Tax Act

The exemption amount under Section 11 of the Income Tax Act includes:

  • Income earned from any property owned by charity trusts and societies for operations carried out for charitable or religious purposes.
  • Voluntary donations are received for the specific purpose of being utilized as a part of the charitable trust or society’s corpus.

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Conditions for Exemption Under Section 11 of Income Tax Act

The conditions of exemption under Section 11 of the Income Tax Act are as follows:

  • The charity trust or society must own all of the property in question. However, as long as the charity or trust was created before the legislation took effect, they are still eligible for tax exemption under section 11 of the income tax act.
  • The received income must be saved or utilized for charity or religious works in India.
  • The received income must be no more than 15% of the total revenue earned by the organization or trust in that fiscal year.
  • The received income must also include any voluntary donations received for a specific purpose of being utilized as a part of the charitable trust or society’s corpus as referred in Section 12 of the Income Tax Act.
  • The received income used to promote international welfare can also be used to claim a tax exemption eligible for tax exemption under section 11 of the income tax act if the following conditions are met:

 

1. If the trust was established on or after April 1, 1952: The revenue used to promote worldwide welfare where India is engaged.

2. If the trust was established before April 1, 1952: The revenue used for philanthropic or religious purposes outside of India.

  • It is not considered charitable or religious work if the received income is credited or paid to any other charity trust or society registered under section 12AA with a clear directive of being utilized as a part of the charitable trust or society’s corpus. Thus, it is not eligible for tax exemption under section 11 of the income tax act.
  • Provisions under Section 40(a) (ia), 40A (3), and (3A) are utilized in deciding the applicable amount under Section 11 of the Income Tax Act.

 

If Applied Income is less than Derived Amount:

If the income in question is less than 85% of the total derived income of the society or trust for a financial year, they can still file a tax exemption on the entire derived amount under section 11 of the income tax act. The remaining 15% needs to be deemed as income applied for charitable or religious purposes. A form 9A1 must be submitted to the assessor, detailing the basis for such deficit and the sum on which the option is implemented, in order to claim exemption. However, it should be noted that the option should be implemented before the deadline of income return fillings under Section 139.

If Utilized Income is less than 85% of the Received Income

If a trust receives more revenue than it can use for charitable or religious purposes in a year, it can set aside more than 15 percent of the income. To do this, they must complete Form 10 and state the purpose and time for which the income will be kept for accumulation (it should not be more than 5 years). Also, the collected funds must be invested in one of the government-approved methods:

  1. Purchase of government savings certificates and any other certificates or securities issued by the government. Government savings certificates are specified in section 2 of the Government Savings Certificates Act of 1959.
  2. An account with a post-office savings bank.
  3. An account with a bank or a cooperative organization engaged in banking.
  4. UTI unit investments
  5. Investment in any government-issued money security.
  6. Government-guaranteed bonds issued by or on behalf of a firm or organization whose interest and principal amounts are completely guaranteed.
  7. A public sector investment or deposit. A business’s shares, on the other hand, will be eligible for 3 years after it ceases to be a public corporation, and any other investment will be eligible until it is repaid by the firm.
  8. Securities issued by a financial company specialized in offering long-term financing for industrial growth and qualified for deduction under section 36 (1).
  9. Bond investments are made with the intention of providing long-term financing for urban infrastructure or home buying in India.
  10. Real estate investment (which excludes plant and machinery)
  11. IDBI deposits
  12. Investments in any other method, as defined in rule 17C, such as mutual funds, incubators, etc.

 

Capital Asset Sales

Exemptions under section 11 of the income tax act for capital gains on the liquidation of a capital asset held fully in trust for charitable or religious purposes include:

Amount spent on buying a new capital asset Tax exemption
Total Net Consideration Total capital gain
A Part of Net Consideration New capital asset cost – Old capital asset cost

Exemptions under section 11 of the income tax act  for capital gains on the liquidation of a capital asset held partly in trust for charitable or religious purposes include:

Amount spent on buying a new capital asset Tax exemption
Total Net Consideration 50% of Total capital gain
A Part of Net Consideration 50% of (New capital asset cost – Old capital asset cost)

For example:

XYZ is a charitable trust who sold its old capital asset worth 80,000 INR for 90,000 INR. The following week, they bought a new capital asset worth 85,000 INR. So, in this case:

  Amount
Old capital asset selling price 90000
Less. Old capital asset cost price (80000)
Capital Gain on old capital asset 10000
New capital asset cost price 85000
Less. Old capital asset cost price (80000)
Utilized capital gain 5000
Taxable capital gain 5000

 Exemption if the property is a commercial venture

It is the responsibility of the appropriate Assessing Officer to decide the amount on which the charitable trust or society can claim a tax exemption under section 11 of the income tax act for the revenue obtained from a commercial venture.

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