Any trust or institution registered u/s 12AA or 12AB of the Income Tax Act 1961 is exempt, subject to the fulfilment of certain conditions

Income of any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in specified sub-clauses of section 10 (23C) of the Income-tax Act, 1961 (the ‘Act’) or any trust or institution registered under section 12AA/12AB of the Act is exempt, subject to fulfilment of certain conditions specified under various sections of the Act. 

Finance Act, 2023 provided that donations made by a trust / institution (other than towards corpus) shall be treated as application for charitable or religious purposes only to the extent of 85% of such donations.

Representations have been received by the Central Board of Direct Taxes (CBDT) raising concerns as to whether the balance 15% of donation to other trust / institution would be taxable or would be eligible for 15% accumulation, since the funds would not be available, having been already disbursed.

CBDT has examined the matter with reference to the issues raised above. Vide Circular No. 3/2024 in F.No.370142/5/2024-TPL dated 06.03.2024, issued today, the matter has been clarified by illustrative examples, for lucid understanding. The said Circular is available on circular-3-2024.pdf (incometaxindia.gov.in).

Donation application rule clarified; CBDT explains tax and accumulation treatment of residual portion for trusts and institutions. Finance Act 2023 limits the portion of donations treated as application for charitable or religious purposes for trusts and institutions registered under section 12AA/12AB and entities under section 10(23C); representations questioned whether the residual portion would be taxable or eligible for accumulation. The CBDT issued Circular No. 3/2024 with illustrative examples clarifying how the statutory limitation affects application and accumulation and addressing practical concerns about funds availability and tax consequences.