Understanding Corpus in Charities – Investment, Restrictions, and Inter-Charity Donations Guide

Table of Contents

1. Meaning of Corpus
2. Background
3. Format of Specific Direction
4. Applicability of Requirement to Invest the Corpus in Section 11(5) Investment Modes
5. Donations for the Construction of the Building
6. Restriction on Application Out of Corpus
7. Income Received from Corpus Donation
8. Inter-charity Donations
9. Treatment of Inter-charity Donations
10. Inter-charity Donations that are not Allowed as the Application of Income
11. Inter-charity Donations that are Permissible as the Application of Income

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1. Meaning of Corpus

The term ‘corpus’ is not defined in the Act, but it generally refers to an organization’s capital. Therefore, any receipts related to corpus should be directly added to the capital. Contributions made for capital purposes are considered as corpus donations, as established in various legal cases.

However, since there are no specific guidelines or definitions regarding the meaning and scope of corpus, it must be understood as permanently available fund which is not subject to any restriction or condition.

To claim a donation as a corpus donation, a written document with a specific direction from the donor should be obtained. In the absence of such a written direction, a donation would not be considered as a corpus donation and the organization would not be entitled to claim full exemption.

Similarly, donations covered by written document but without any specific direction cannot be claimed as corpus donation. The requirement is of a specific direction and not of an indirect consent. However, it is not necessary that such written direction should necessarily be accompanied with the donation. A subsequent confirmation by the donor should be considered as requisite specific direction. The discretion lies with the donor whether the donation should be a corpus donation or not. In the absence of a specific direction characterizing a donation to be a corpus donation, it should be deemed as a voluntary contribution. The recipient organization has no right to treat a donation as a corpus donation. The Finance Act, 2021 has imposed a condition that the corpus donations shall be exempt only if invested in the modes specified under section 11(5) of the Act.

A corpus donation is not mandatory to be utilized and may be accumulated indefinitely. However, there is no restriction under the Income-tax Act on utilizing such funds for charitable purposes. The Finance Act, 2021 has introduced a provision stating that any expenditure or application made from the corpus donation will not be considered eligible for 85% application towards charitable or religious purposes. Instead, the amount spent from the corpus donation will be permitted as an application in the year it is deposited back into the corpus, to the extent of the deposit or investment made. Voluntary Contributions received for the renovation and repair of temples, mosques, gurudwaras, churches, etc. notified under section 80G(2)(b), may, at its option, be treated by such trust or institution as forming part of the corpus of the trust or the institution subject to certain conditions.

2. Background

Section 11(1)(d) of the Act, provides for exemption of “corpus” donation received by a registered charitable institution. The said section has been amended by the Finance Act, 2021 with effect from assessment year 2022-23 to provide that those contributions received as corpus donations would be regarded as exempt under section 11(1)(d) only if they are invested or deposited in one or more forms or modes specified in section 11(5) of the Act, and maintained specifically for such corpus.

The relevant portion of the Explanatory Memorandum to the Finance Bill, 2023 reads as follows:

“Rationalisation of the provision of Charitable Trust and Institutions to eliminate possibility of double deduction while calculating application or accumulation under the existing provisions of the Income-tax Act, 1961, corpus donations received by trusts, institutions, funds etc. are exempt as follows:

(a) Explanation to third proviso to clause (23C) of section 10 provides that income of the funds or trust or institution or any university or other educational institution or any hospital or other medical institution, shall not include income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus.

(b) Clause (d) of sub-section (1) of Section 11 provides those voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the total income of the trust or institution.

These entities are not allowed to accumulate more than 15% of their income or accumulate for specific purpose up to 5 years, other than corpus donations referred above. Instances have come to the notice where these entities claim the corpus donations to be exempt and at the same time claim their application as part of the mandatory 85% application from income other than such corpus. This results in a situation where the corpus income has been exempted and its application has been claimed as application against the mandatory 85% application of non-corpus income.

Instances have also come to the notice where these entities take loans or borrowings and make application for charitable or religious purposes out of the proceeds of loans and borrowings. Such loans or borrowings when repaid, are again claimed as application. This results in unintended double deduction.

Both these situations, at times, also result in paper loss which is claimed by the assessee as carry forward resulting in unintended short application (less than 85%) in following years.

To ensure that there is no double counting while calculating application or accumulation, it has been proposed that—

(a) Voluntary contributions made with a specific direction that it shall form part of the corpus shall be invested or deposited in one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus.

(b) Application out of corpus shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C) and clauses (a) and (b) of section 11. However, when it is invested or deposited back, into one or more of the forms or modes specified in sub-section (5) of section 11 maintained specifically for such corpus from the income of the previous year, such amount shall be allowed as application in the previous year in which it is deposited back to corpus to the extent of such deposit or investment.

(c) Application from loans and borrowings shall not be considered as application for charitable or religious purposes for the purposes of third proviso of clause (23C) and clauses (a) and (b) of section 11. However, when loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as application in the previous year in which it is repaid to the extent of such repayment.

(d) Clarify in both clause (23C) of section 10 and section 11 that for the computation of income required to be applied or accumulated during the previous year, no set off or deduction or allowance of any excess application, of any of the year preceding the previous year, shall be allowed.”

All of the following conditions are required to be fulfilled for a receipt to be exempt under section 11(1)(d) of the Act:

• A charitable institution receives income;
• The income is in the form of contribution;
• The contribution is voluntary;
• The contribution is received with a specific direction that it shall form part as corpus of the institution;
• The voluntary contribution is invested or deposited in one or more of the forms or modes specified in section 11(5) (“Permissible Mode”);
• Such investment or deposit is maintained specifically for such corpus.

Donation are being regarded as corpus donation. If all the aforesaid conditions are fulfilled than:

(a) The voluntary contribution referred to above will be excluded from the total income of the charitable institution;

(b) The charitable institution will not be required to apply the corpus donations to the extent of 85% under section 11(1)(a);

(c) The charitable institution will not however, get benefit of 15% basic accumulation under section 11(1):

• • On the amount of such donations;
  • With respect to such donation, the charitable institution will not be required to fulfil procedural requirements such as filing of forms or consider exercise of option under —

(i) Explanation 2 to section 11(1) i.e. filling of Form 9A or 10

(ii) Section 11(2).

The provision applies to donations which are claimed as Corpus Donations. It does not apply to other self created corpus, such as:

(a) Corpus out of basic accumulation of 15%.

(b) Corpus out of taxable income such as business income taxable under proviso to section 2(15) etc.

3. Format of Specific Direction

The Income-tax Act or Rules do not prescribe a specific form or manner in which a specific direction must be given for a corpus donation. However, a simple letter can suffice as a specific direction if it contains a clear and unambiguous statement that the donation is intended for the corpus and is signed by the donor or an authorized representative. As mentioned earlier, the Act requires that the specific direction for a corpus donation must be in writing to establish evidence of the donor’s intent. There should be evidence to show that the direction came from the donor.

4. Applicability of Requirement to Invest the Corpus in Section 11(5) Investment Modes

The condition of investing the corpus fund in section 11(5) investment shall apply only to that part of corpus fund which has been created from corpus donations exempted under section 11(1)(d), because organizations may have corpus funds invested in business assets under section 11(4) or (4A) which do not conform to the requirements of section 11(5).

The corpus fund of an organization may be created through many sources and may also include assets which do not conform to section 11(5). The sources from which a corpus fund could be created are broadly as under:

(a) Corpus donation received with the specific direction (covered u/s. 11(1)(d))

(b) 15% accumulation after applying 85% of income.

(c) By payment of taxes, for example an organization pays taxes against anonymous donations in excess of 5%.

(d) At the time of creation of trust corpus may come as cash, property or even business.

(e) Corpus donation from any other exempt income not subject to application under section 11.

For the sake of greater clarity, it may be noted after the amendment only application to the corpus fund to the extent created out of corpus donation received under section 11(1)(d) as mention in point No. (a) above has to remain invested as per section 11(5) for example such fund cannot be used for incidental business activity which is possible with other corpus fund.

5. Donations for the Construction of the Building

Now corpus donation would imply that the funds so received have to be retained in the form of investments. In other words, corpus donation received towards construction of building or any other asset will no longer be treated as corpus donation. For example, if some donation is received for creation of assets for project purposes, then such donation cannot be treated as corpus donation.

6. Restriction on Application Out of Corpus

Conditions to be satisfied while making an application out of corpus:

Under the current provisions, an income of the trust is exempt from being included in its total income if the income it derives from a property held under trust for charitable or religious purposes if such income is applied for charitable purposes in India, subject to certain conditions. However, the conditions required for making an application from the corpus for charitable or religious purposes were not previously mandated to be satisfied.

The Finance Act, 2023 inserted certain amendments whereby, an application from the corpus does not meet the specified conditions, depositing the amount back into the corpus will not be treated as an application. Consequently, the conditions that are required to be satisfied for the application of income for charitable or religious purposes must also be satisfied when making an application from the corpus. Therefore, the restoration of the corpus can only be considered as an application if the conditions specified for making an application for charitable or religious purposes are met at the time of making the application from the corpus. Now, the restoration of the corpus shall be subject to the following specified conditions:

(i) Such application should not be in the form of a corpus donation to another trust.

(ii) TDS, if applicable, should be deducted on such application.

(iii) Where payment or aggregate of payments made to a person in a day exceeds ` 10,000 in other than specified modes (such as cash) is not allowed.

(iv) Carry forward and set off of excess application is not allowed.

(v) Application is allowed in the year in which it is actually paid.

(vi) The application should not directly or indirectly benefit any person referred to in section 13(1) of the Act, and the income of the trust or institution should not ensure any benefit to such related person, and

(vii) The application should be in India except with the approval of the Board in accordance with the provisions of section 11(1)(c).

Now, it is crucial to maintain a record of the amount of eligible application that meets the specified conditions and to disclose it in the notes to accounts to ensure transparency and clarity that such application corpus is an eligible application.

Furthermore, the Finance Act, 2023 amendments stipulates that such investments or deposits are made back into the corpus will only be allowed as applications for charitable or religious purposes if made within five years from the end of the previous year in which such application was made from the corpus.

For example, a charitable trust received a corpus of 5 lakhs in year 1 and used ` 3 lakhs from the corpus for charitable purposes in the same year. In year 3 the trust invests ` 3 lakhs back into the corpus. Now after the recent amendment, the trust could claim this investment as an application for charitable or religious purposes. However, if the trust does the same in year 6 to invest the same amount back into the corpus, it could not claim it as an application for charitable or religious purposes after the above amendment.

However, as per the amended provisions, if an application was made out of corpus on or before 31-3-2021, it cannot be set off against any future year’s income from 1-4-2023, regardless of whether it was claimed as an application in the respective year or not. This means that if an organization made its activity from corpus funds up to 31-3-2021 and could not replenish its corpus back by 31-3-2022, it would deplete its corpus to that extent and no further application shall be allowed in respect of the said utilization.

7. Income Received from Corpus Donation

(a) Income collected through donation boxes is not considered as corpus even if the boxes are marked “donation towards corpus”.

(b) The Supreme Court of India in the case of CIT v. Mata Amrithanandamayi Math Amritapuri [2018] 94 taxmann.com 82/256 Taxman 62 held that where assessee received corpus donation on which it earned interest, in view of specific direction of donors that said interest would also form part of corpus, assessee’s claim for exemption under section 11 in respect of interest so earned was to be allowed.

(c) In case, a charitable organization loses exemptions by virtue of violations under section 13(1), then corpus income will also be included in the total income, which may be subjected to tax.

8. Inter-charity Donations

Inter-charity donation is permissible, but it is to be ensured that inter-charity donation is given for the objects for which the donor trust is created. In other words, the donor and donee should share similar objects. As per The ITAT Allahabad in the case of Nazareth Hospital Society v. Deputy Commissioner of Income-Tax (Exemption) Lucknow Uttar Pradesh [IT (Appeal) No. 165 (All.) of 2018, decided on 18-2-2021].

Inter-charity donation is treated at par with direct application for the purposes of sections 11(1)(a) and 10(23C). Therefore only 85% of the eligible voluntary donations made by a trust or institution registered under section 12AB to another trust or institution registered under section 12AB or approved under section 10(23C), will be considered as the application of income. (Effective from the Assessment Year 2024-25).

Corpus donation given by a section 12AA/12AB registered institution to a section 12AA/12AB registered NGO as well as to a section 10(23) approved institution will not be treated as an application of income or corpus donation given by a section 10(23C) approved institution to a section 12AA/12AB registered trust as well as to a section 10(23) approved institution will not be treated as an application of income.

Once funds have been accumulated under section 11(2), they can only be utilized for charitable purposes directly by the organization in question and cannot be transferred between organizations. However, if a charitable organization is dissolved, inter-charity donations from the accumulated funds under section 11(2) will be allowed. In such case, an organization will still be considered charitable even if all of its donations are given as inter-charity donations and the same is allowed.

9. Treatment of Inter-charity Donations

The inter-charity donations can be classified for tax purposes into the following two broader categories:

(a) Inter-charity donations that are not allowed as the application of income:

• • • Inter-charity donation towards corpus fund out of income by section 12AB registered trusts.
    • Inter-charity donation towards corpus fund out of income by section 10(23C) approved institutions.
    • Inter-charity donation out of accumulated funds under section 11(2) except in the case of dissolution.
    • Inter-charity donation out of accumulated funds under section 11(2) in case of dissolution.
    • Inter-charity donation out of accumulated funds other than accumulated under section 11(2).

(b) Inter-charity donations that are permissible as the application of income:

• • • Inter-charity donation not towards corpus out of income.

10. Inter-charity Donations that are not Allowed as the Application of Income

The type of Inter-charity donations that are not allowed as the application of income is discussed in the coming paragraphs:

(i) Inter-charity donation towards corpus fund out of income by section 12AB registered trusts

The Finance Act, 2017 introduced a restrictive amendment by the way Explanation 2 to section 11(1), whereby any corpus donation to another organization registered under section 12AA would not be considered as an application of income. However, after the Finance Act of 2020, a corpus donation made by a section 12AA/12AB registered trust to either a 12AA/12AB registered trust or a section 10(23C) approved institution will not be considered as an application of income or the Donor Trust.

(ii) Inter-charity donation towards corpus fund out of income by section 10(23C) approved institutions

Similarly, the Finance Act of 2020, any corpus donation made by a section 10(23C) approved entity to either a section 12AA/12AB registered NGO or a section 10(23C) approved institution will not be treated as an application of income, after the Finance Act of 2020.

(iii) Inter-charity donation out of accumulated funds under section 11(2)

The Finance Act, 2002 prohibits donations to other charitable organizations out of the accumulated funds. The amendment puts restrictions on donations to other charities only out of accumulated funds under section 11(2).

(iv) Inter-charity donation out of accumulated funds under section 11(2) in case of dissolution

The Finance Act of 2003 added a proviso to section 11(3A), which allows for inter-charity donations out of accumulated funds in the event of the dissolution of a charitable organization. This amendment was made to remove the difficulties faced by charitable organizations that are winding-up.

(v) Inter-charity donation out of accumulated funds other than accumulated under section 11(2)

There is no bar in making inter-charity donations out of accumulated funds [other than accumulation u/s 11(2)] but in such cases, as these donations are not made out of the income during the year, these inter-charity donations shall not be considered as an application of income against the current year income.

11. Inter-charity Donations that are Permissible as the Application of Income

The inter-charity donations that are permissible as the application of income are as follows:

(i) Inter-charity donation not towards corpus out of income

The inter-charity donation not towards corpus out of income shall be considered as the application of income for the purpose of section 11 of the Income-tax Act. However, it is to be ensured that inter-charity donations are used for similar objects. Hence, the inter-charity donation can be for specified purposes as per the objects of the donor trust and to the donee trust having similar objects.

Inter-charity donations are to be considered as the application only to the extent of 85% of the donation

The Finance Act, 2023 inserted clause (iii) in Explanation 4 to section 11(1) w.e.f. 1-4-2024 as under:

The Finance Act, 2023 has provided that any voluntary amount and not corpus credited or paid to any fund or trust or institution or any university or other educational institution or any hospital or other medical institution, referred to in section 10(23C)(iv)/(v)/(vi)/(via) or other trust or institution registered under section 12AB, as the case may be, shall be treated as application for charitable or religious purposes only to the extent of 85% of such amount credited or paid.

The amended Finance Act, 2023 allows only 85% of the eligible donations made by a trust or institution registered under section 12AB to another trust or institution registered under section 12AB or approved under section 10(23C) shall be treated as the application. This amendment will take effect from 1-4-2024.

The impact of pre and post-amendment has been explained with the example in the table below:

*The total income of ` 80,000 can be accumulated to be used for religious or charitable purposes within the next 5 years by filing Form 10, or it can be considered as deemed to be applied in next year for such purposes by filing Form 9.