Note on restrictions imposed by Finance Act, 2021 pertaining to utilization of corpus donation by Charitable & Religious Trust

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Law Update

Finance Act 2021 has brought out an important amendment with regards to Charitable & Religious Trust wherein corpus donations are exempt but its utilization is subject to certain conditions. The Corpus donation is exempt from tax subject to the condition that corpus donations received remain invested in the mode of investments permitted u/s 11(5) of the Income Tax Act, 1961 for investment of trust funds.

Some of the regular modes of investments referred u/s 11(5) for easy understanding are as under:

– Investment in savings certificates under Small Savings Schemes of Government.

– Deposit in any account with the Post Office Savings Bank.

– Deposit in any account with a scheduled bank or a co-operative bank

– Investment in units of the Unit Trust of India

– Investment in any security issued by the Central or a State Government;

– Investment in debentures issued by, or on behalf of, any company or corporation fully and unconditionally guaranteed by the Central or a State Government.

– Investment or deposit in the public sector company.

– Deposits with or investment in any bonds issued by a financial corporation.

– Deposits with or investment in any bonds issued by an eligible public company.

– Investment in immovable property.

– Deposits with the Industrial Development Bank of India;

– Investment in the units of the mutual fund referred to in clause (23D) of section 10 of the Income-tax Act, 1961

– Investment made by a recognized stock exchange referred to in the Securities

– Contracts (Regulation) Act, 1956 in the equity share capital of eligible company.

– Investment in Stock Certificate of the Sovereign Gold Bonds Scheme, 2015,

– Any other form or mode of investment or deposit as may be prescribed.
 

Some key takeaways with regards to Corpus donation and its application is as under:

  1. Application / Expenditure on objects of trust from corpus funds not permitted for AY 2022-23 onwards (not retrospective) i.e. on and after 1.4.2021.
  2. Any application out of corpus will not be considered as application for the year.
  3. Subsequent deposit/ reinvestment will lead to allowance as application of income in the year of deposit to the extent of deposit
  4. For example,  Corpus donations received during FY 2021-22 Rs. 10 Cr.  Spending out of above corpus donation towards objects of trust during FY 2021-22 Rs. 2.5 Cr.  Amount disallowed as application of income during FY 2021-22 Rs. 2.5 Cr  Re-investment of funds into permitted modes during FY 2022-23 Rs.1.5 Cr  Application allowable in FY 2022-23 Rs. 1.5 Cr  Balance application pending to be allowed subject to re-investment in permitted modes Rs.1.00 Cr

How to track utilization of corpus donation (Suggestions and not prescribed under Law):

  • Open a new bank account specifically designated for corpus funds
  • Transfer all corpus donations received from 1.4.2021 till date to the said new bank account.
  • All subsequent corpus donations received to be deposited in special designated account. (no other funds to be credited in the said account)
  • If amount already invested, ear mark the specific investment as corpus fund investments and redemption/ sale income therefrom to flow into special designated account only.
  • If amount already applied/ spent, better to transfer equivalent funds from normal bank account to special designated account to avoid any disallowance during FY 2021-22
  • All incomes accruing on corpus fund balances/ investments therefrom are freely available for application, hence to be transferred from special designated account to normal bank account to enable utilisation of same
  • For example,  Corpus donation receipt during FY 2021-22 Rs. 10 Cr, invested in FD.  Interest received on FD at year end Rs. 10 lakhs (credited in special designated account)  Interest Rs. 10 lakhs to be transferred from special designated account to normal trust account to enable utilisation as eligible as application of income.
  • If special designated account is not opened, one can ear mark corpus fund investments and keep track of the same

Disclaimer: The purpose of this blog is for education purpose and should not be construed as professional advice. Views expressed herein are the personal views of the author. Government or judicial authorities may or may not subscribe to the views expressed herein. The author of the blog is not liable for any implications arising out of actions taken based on the views expressed herein.

 

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