COURTKUTCHEHRY SPECIAL REPORT
Taxation of Public and Private Trusts in India: Key Rules, Exemptions, and Compliance Challenges
Public Charitable and Religious Trusts Face Strict Rules on Income Application and Registration
Private Trusts Taxed Differently Based on Beneficiaries’ Rights and Business Activities
By Our Legal Reporter
New Delhi: December 12, 2025:
Trusts are central to India’s social and financial ecosystem. Public charitable and religious trusts support education, healthcare, poverty relief, and religious practices, while private trusts help families manage wealth and succession. The Income-tax Act, 1961 provides a detailed framework for their taxation, exemptions, and compliance. Recent amendments, especially under the Finance Bill 2025, have tightened rules to ensure transparency and accountability.
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Public Charitable and Religious Trusts
Accumulation Beyond 15%
Public trusts must apply at least 85% of income to charitable purposes annually. However, under Section 11(2), they may accumulate beyond 15% if:
- They file Form 10 before the return due date.
- The accumulation period does not exceed five years.
- Funds are invested in approved modes under Section 11(5) (government securities, notified bonds, bank deposits).
- The purpose is specific (e.g., building a hospital), not vague like “general charitable purposes.”
Failure to comply makes the accumulated income taxable at the maximum marginal rate (MMR).
Religious Trusts vs Charitable Trusts
While both enjoy exemptions under Sections 11 and 12, religious trusts have broader protection:
- Purely religious objects are exempt even if not “charitable” under Section 2(15).
- Anonymous donations are not taxable under Section 115BBC for wholly religious trusts, unlike charitable trusts.
- Section 13 restrictions are interpreted more liberally for religious trusts, especially regarding ritual expenses.
- However, trusts benefiting a specific religious community may face restrictions under Section 13(1)(b) unless exceptions apply.
Section 12AB Registration
Introduced to replace Section 12A/12AA, Section 12AB requires periodic revalidation of trust registration:
- Registration is valid for five years and must be renewed.
- Without registration, exemptions under Sections 11 and 12 are denied.
- Non-compliance (e.g., related-party transactions, non-charitable business) can lead to cancellation and taxation at MMR.
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Application of Income
Capital Expenditure
Capital expenditure for charitable purposes (e.g., building schools, hospitals) counts as application of income. Courts have upheld this principle, ensuring trusts can expand infrastructure. However, misuse or private benefit disqualifies exemption.
Property Income
Rental income from property held under trust is exempt under Section 11(1)(a) if applied to charitable purposes. Misuse, such as letting property to related persons at below-market rent, attracts Section 13 restrictions.
Foreign Contributions
Foreign donations under FCRA registration are treated as voluntary contributions under Section 12(1). They remain exempt if applied for charitable purposes. Cancellation of FCRA registration, however, makes such receipts taxable.
Private Trusts
Specific Trusts (Determinate Beneficiaries)
- Taxed under Section 161(1) as representative assessee.
- Trustee taxed in the same manner as beneficiaries.
- Income retains its character (business, capital gains, etc.).
- Distributions exempt under Section 10(2) to avoid double taxation.
Discretionary Trusts (Indeterminate Beneficiaries)
- Taxed under Section 164(1) at MMR.
- Exceptions exist for trusts created exclusively for minors or by will for dependents.
- Courts uphold MMR to prevent misuse of discretionary powers.
Business Income of Private Trusts
- Business income of private trusts is generally taxed at MMR under Section 161(1A).
- Exceptions: incidental business of charitable trusts or trusts declared by will for dependents.
- Discretionary trusts always taxed at MMR for business income.
Compliance Challenges
- Form filings (Form 9A, Form 10) are mandatory for accumulation and carry-forward of income.
- Donor records must be maintained to avoid anonymous donation tax under Section 115BBC.
- Capital application rules tightened after Finance Act 2021, requiring replenishment of corpus if spent.
- FCRA compliance is critical for foreign contributions.
- Periodic registration under Section 12AB ensures ongoing scrutiny.
FAQ on Taxation of Public and Private Trusts in India
Q1. Can a Public Charitable Trust accumulate income beyond 15%?
Yes. Under Section 11(2), trusts may accumulate more than 15% of income if they file Form 10 before the return due date, specify the purpose clearly, and invest funds only in approved modes under Section 11(5). The accumulation period cannot exceed five years. Misuse or vague purposes make the income taxable at the maximum marginal rate (MMR).
Q2. How is taxation of a Public Religious Trust different?
Religious trusts enjoy broader exemptions. Purely religious objects qualify even if not “charitable” under Section 2(15). Anonymous donations are not taxable under Section 115BBC for wholly religious trusts, unlike charitable trusts. However, trusts serving only one community may face restrictions under Section 13(1)(b).
Q3. What is the role of Section 12AB registration?
Section 12AB is the new registration regime. Without it, trusts cannot claim exemptions under Sections 11 and 12. Registration is valid for five years and must be renewed. Non-compliance, such as engaging in non-charitable business or related-party transactions, can lead to cancellation and taxation at MMR.
Q4. Are capital expenditures treated as application of income?
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Yes. Capital expenditure for charitable purposes (e.g., building schools, hospitals) counts as application of income. However, misuse or private benefit disqualifies exemption. Application from corpus funds is valid only if later replenished.
Q5. How is property income taxed for Public Trusts?
Rental income from property held under trust is exempt under Section 11(1)(a) if applied to charitable purposes. Misuse, such as letting property to related persons at below-market rent, attracts Section 13 restrictions.
Q6. What about foreign contributions under FCRA?
Foreign donations received under valid FCRA registration are treated as voluntary contributions under Section 12(1) and exempt if applied for charitable purposes. Cancellation of FCRA registration makes such receipts taxable.
Q7. How are Private Trusts taxed?
- Specific Trusts (determinate beneficiaries): Trustee taxed under Section 161(1) in the same manner as beneficiaries. Distributions are exempt under Section 10(2).
- Discretionary Trusts (indeterminate beneficiaries): Taxed under Section 164(1) at MMR.
- Business income: Generally taxed at MMR under Section 161(1A), except in limited cases.
Conclusion
The taxation of trusts in India reflects a balance between encouraging charitable activity and preventing misuse. Public trusts enjoy exemptions but must comply with strict rules, while private trusts face taxation based on certainty of beneficiaries’ shares and business activities. Anonymous donations, corpus funds, and foreign contributions are subject to specific provisions, and violations can lead to heavy tax liabilities.
For trustees and beneficiaries, understanding these rules is essential to preserve exemptions, ensure compliance, and maintain public confidence in the trust system.
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