Charitable and religious trusts in India enjoy significant tax exemptions under Section 11 of the Income-Tax Act. However, these benefits come with strict compliance requirements regarding how their funds are invested. Failure to follow these rules can lead to taxation of income and loss of exemption.
🏛️ Why Regulate Trust Investments?
Section 11 aims to ensure that trust funds are safeguarded and used for charitable purposes only. Any income accumulated and not immediately spent must be invested in approved modes specified in Section 11(5).
✅ Key Mandatory Rules for Trust Investments
Registration & Applicability: Only trusts registered under Section 12A/12AB can claim exemption under Section 11.
Apply 85% of Income Annually: At least 85% of the trust’s income must be applied to charitable purposes during the year.
Invest Accumulated Income in Approved Modes: Unspent income (up to 15% or properly accumulated) must be invested only in Section 11(5) approved instruments.
📌 Approved Investment Modes under Section 11(5)
• Government Savings Certificates and G-Secs
• Deposits with Scheduled Banks or Cooperative Banks
• Post Office Savings Accounts
• Units of Unit Trust of India (UTI)
• Shares, bonds, or debentures of Public Sector Companies
• Mutual Funds meeting prescribed criteria
• Immovable property (excluding plant/machinery)
• Any other government-notified instrument
📊 Summary Table: Rules for Trust Investments
| Rule / Requirement | Why It Matters |
| Registration under Section 11 | Essential for claiming tax exemption |
| ≥ 85% Income Applied in Year | Prevents excessive accumulation |
| ≤ 15% Accumulated Income | Can be retained but must be invested |
| Investments in Modes per Section 11(5) | Preserves exemption status |
| Use of Non-permitted Investments | Income taxed; may lose exemption |
⚠️ Consequences of Non-Compliance
Investing outside permitted modes can result in the income from such investments being taxed. The trust may also face scrutiny and risk losing its Section 11 exemption.
❓ Frequently Asked Questions
Can a charitable trust invest in stocks or equity mutual funds?
Only if these fall under approved modes and meet criteria specified under Section 11(5).
What happens if a trust accumulates more than 15% income?
It must file Form 10 to inform the tax officer and use the funds within 5 years.
Are donations to trust taxable?
Corpus donations invested as per Section 11(5) are exempt; anonymous donations above ₹1 lakh may be taxable.
Do private trusts have to follow these rules?
No, these rules apply to charitable/religious trusts claiming Section 11 exemption.
Who monitors compliance?
The Income Tax Department and state Charity Commissioners monitor and enforce compliance.
📝 Conclusion
By understanding and adhering to the mandatory investment provisions of Section 11(5), trustees can ensure their organisation remains compliant and continues to enjoy tax benefits. Regular reviews of investment holdings and prompt corrective actions are key to avoiding penalties.
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