Income tax on corpus Donation- Important amendment made by Finance Act 2021

Finance Act, 2021 has brought important changes in the provisions related to taxability of corpus donation in the Income Tax Act, 1961. We all know that corpus donation received by a trust is exempted from Income Tax. The contributions received as corpus donation is not included in the total income of the trust. But a major amendment has been made in this regard by the Government of India to plug certain loopholes in the law. Therefore, it becomes important to discuss the corpus donation in the light of amendments made by Finance Act, 2021.

Before moving towards the analysis of the amendment, some of you would be interested to know about “What is Corpus Donation”. So, we will first understand about the concept of ‘Corpus Donation’.

What is Corpus Donation under Income Tax Act?

It will be very surprising for you to know that ‘Corpus Donation’ is not defined anywhere in the Income Tax Act. So, we will understand the meaning of ‘Corpus Donation’ in general sense.

• In simple words, ‘Corpus Donation’ is a donation of permanent nature and somewhat like capital of an organization. Not every donation received by a trust is a corpus donation.
• A donation qualifies as a ‘Corpus Donation’ only when the donor makes a specific direction that such donation should form part of the corpus of the organization. If no such direction is given by the donor, the donation shall be treated as ‘voluntary contribution’ or general donation for the purpose of Income Tax Act.

If you are making corpus donation, you will need the format of declaration for corpus donation. Click on the following link to access:

Corpus Donation Letter Format

Purpose of Corpus Donation

As discussed above, corpus donation is of a permanent nature and is like capital for an organization. So, a question arises as to what is the purpose of ‘Corpus Donation’?

• We all are aware that the major source of income for any trust or NGO is donations or grants which is not regular in nature. So, every trust/NGO needs some fixed source of income to meet its fixed expenditures like salary, rent etc.
• The Corpus donation is intended to provide a fixed income in the form of interest income/ dividend income on investment made out of corpus funds. This fixed income helps the trust to manage its daily expenditures of fixed nature related to administration & management of the trust/NGO.
• Corpus Donation is generally not applied towards the objects of the trust/NGO. Such donation is utilised only as per the directions of the donor. The income arising on investment of corpus donation can be utilized by the trust/NGO for fulfilling its charitable and social objectives.

Note: Corpus Donations received by a trust/NGO are kept separate in ‘Corpus Fund’ distinct from General Fund of the trust/NGO.

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Reasons for amendment by Finance Act 2021

It is a well-known fact that before amendment by Finance Act, 2021, corpus donation received by a trust/NGO was altogether exempted from income tax. Section 11(1) of the Income Tax Act provided as below:

Thus, before amendment, if any donation is received with a specific direction that it shall form part of corpus, then it shall not be treated as a part of the total income of the trust/institution. Therefore, the trust/NGO is not required to pay any income tax on corpus donations received by it.

But in actual practice, rather than accumulating corpus donations apart, many trusts/ NGOs were utilizing the corpus donation for application towards their charitable objectives which is beyond the purpose & intention of the law. Even they were claiming the utilisation of corpus donations for the purpose of threshold limit of 85% application of income of the trust/NGO during the year.

Thus, at the one side, the trusts/ NGO claimed the corpus donation to be exempt and on the other side, they were claiming the utilisation of corpus donations to reach threshold limit of 85% application prescribed in the Act to get exemption in respect of voluntary (general) donations. In this manner, the trusts/NGOs were able to get benefit of double deductions in respect of the corpus donations. The amendment made by the Finance Act, 2021 is intended to avoid such practices by trusts/ NGOs.

Corpus Fund Amendment

Amendment in corpus donation made by Finance Act, 2021

Section 11(1)(d) has now been amended by Finance Act, 2021 by adding certain words to the clause. Amended clause (d) of section 11(1) now reads as follows:

Analysis of Amendment:

From the above language, it is clear that contributions received by a trust/NGO which are directed by the donor to be part of the corpus shall be compulsorily invested or deposited in one or more of the modes as specified in section 11(5) of the Income Tax Act. If the trust/NGO fails to comply the amended provision, such corpus donation shall not get exemption from tax and will thus form part of the total income of the trust/ NGO for that previous year.

This is one part of the amendment made by the Finance Act, 2021. To restrict the practice of claiming utilisation of corpus towards threshold limit of 85% in case of application for charitable or religious purposes, the Government added an Explanation to Section 11(1) of the Income Tax Act, 1961 which reads as follows:

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Analysis of Explanation 4(i) inserted to section 11(1)

• It is made clear that there is still no restriction on utilisation of corpus funds for application towards charitable or religious purposes. The amendment only intends to avoid the practice of the trusts/NGO of claiming utilisation of corpus donations for prescribed threshold of 85% application to charitable or religious purposes.
• Utilisation out of the corpus for charitable or religious purposes shall not be considered as application for charitable or religious purposes for the purpose of clause (a) and (b) of section 11(1).
• This means that if corpus funds are utilised by any trust/NGO for its charitable or religious activities, it can not claim such utilisation to fulfil the prescribed criteria of 85% application towards charitable or religious activities.
• However, it has also been provided that the amount not so considered as application for charitable or religious purposes shall be considered as application of the previous year in which the amount is invested or deposited back, into one or more of the forms or modes specified in section 11(5) of the Income Tax Act, 1961 maintained specifically for such corpus from the income of that previous year.

When should investment be made out of corpus donation?

• Section 11(5) does not speak anything about the timing of making investments out of corpus donations. Generally, such donations are received directly in the bank accounts of the trust/NGO as there are restrictions on making donations in cash upon the donors. We all are aware that donations in excess of Rs. 2,000 in cash are not eligible for deductions under section 80G of the Income Tax Act. Receipt of donations in bank account itself is an eligible mode of investment u/s 11(5). Hence, there is not any issue of timing of investment out of corpus donations in the prescribed modes u/s 11(5) of the Act.
• However, the trust/ NGO should ensure that corpus donations are taken in a separate bank account so that these can be distinguished from the General Fund of the trust/NGO and thus can be proved legitimately before the tax authorities. It is to be noted that such account may be a current account or a saving account depending upon the choice of the trust/NGO.
• The trust/NGO could invest in any other permissible modes u/s 11(5) at any point of time from the amount so parked in the bank account.

Modes of investments prescribed u/s 11(5) of the Income Tax Act

Following are the modes of investment as prescribed under section 11(5) of the Income Tax Act:

• Investments in Government Saving Certificates and any other securities or certificates issued by Central Government under Small Savings Schemes
• Deposit in Post Office Savings bank
• Deposit (saving/current/recurring/fixed) in any account with a scheduled bank or co-operative society engaged in carrying on the business of banking
• Investment in units of UTI
• Investment in any security for money created and issued by Central/State Government
• Investment in debentures of a company fully and unconditionally guaranteed by the Central or State Government
• Investment or deposit in any public sector company
• Deposits in any bonds issued by a financial corporation engaged in providing long-term finance for industrial development in India
• Investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of residential houses in India
• Investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India.
• Investment in immovable property (not including any plant or machinery)
• Deposit with IDBI
• Any other prescribed mode of investment or deposit

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Is separate bank account necessary for corpus fund?

As discussed above, there is no binding requirement of the law to keep separate bank account for ‘each and every’ corpus donation. However, a separate bank account should be kept by the trust/NGO for corpus donations in such a manner that all the corpus donations received from different donors could be kept in such account and could be easily identified separately. The words ‘maintained specifically for such corpus’ indicates that the balances standing in the corpus should be clearly separable and identifiable distinct from General Funds of the Trust/NGO.

Is Corpus donation taxable?

Before amendment by Finance Act, 2021, the corpus donation was altogether exempt from income tax. However, after the amendment, the corpus donation shall be exempted from tax only when the corpus donations are invested in the modes and forms as prescribed under section 11(5) of the Income Tax Act, 1961.

Also Read the following article: www.taxwink.com/blog/corpus-donation-by-trust-to-other-trust

Author’ Note:

The above article covers only one of the major amendments in respect of corpus donations for trusts/NGOs as made by Finance Act, 2021.There are few other important amendments dealing with trusts/NGOs made by Finance Act, 2021 which we will discuss in other article. For any query related to this article, you can mail at: ca.naveen80@gmail.com

Disclaimer:

The above article is intended for informative purposes only and thus have no legal binding. Readers are therefore, requested to act diligently and under consultation with any professional before applying the information given in the above article. ‘Taxwink’ is not responsible for any loss or damage caused to any person on the basis of reliance on the above information.