Mr. Pramod Achuthan (Partner, Ernst & Young LLP), Mr. Rajesh Mittal (Director) and Mr. Pranav Lodha (Senior Consultant) elaborate on the changes introduced by the Finance Bill, 2025 benefiting the smaller trusts including extended registration validity from 5 years to 10 years. Outlining certain overlooked aspects of Budget 2025 for charitable trusts, the authors conclude by remarking that “The Finance Bill, 2025 brings positive changes for charitable trusts by simplifying compliance requirements. These updates create a more supportive environment for charitable organizations, allowing them to focus on their core mission…It would be interesting to watch the tax law changes that would be proposed by the new Income Tax Bill.”

“First Steps for Ease of Compliance for Charitable Trusts”

The Hon'ble Finance Minister, while presenting her 8th budget, emphasized the Government's commitment to simplify tax compliance. Over recent years, charitable trusts have navigated a sea of amendments concerning registration, application of income, and more, leading to a comprehensive overhaul of the entire provisions. These amendments, coupled with significant judgments from the Supreme Court, have significantly affected charitable trusts.

The Finance Bill 2025, however, brings certain relief for charitable trusts. This year's focus has been on rationalizing existing provisions, streamlining compliance requirements, and providing much needed relief, especially to charitable trusts. The smaller trusts stand to benefit from these changes, as they often grapple with more significant compliance challenges.

1. Incomplete Applications under Section 12A(1)(ac) of the Act, no longer cause for rejection

Charitable trusts are required to register with the Commissioner of Income Tax (CIT) or the Principal Commissioner of Income Tax (PCIT) under section 12A(1)(ac) of the Income-tax Act, 1961 (‘the Act’) submitting detailed information via Form 10A.  The Finance Act of 2023 introduced clauses which deemed incomplete or inaccurate applications as "specified violations".  Hence, even minor errors or omissions in Form 10A could result in irreversible cancellation of registration, creating significant difficulties for trusts. These stringent requirements often led to rejections over inconsequential mistakes, placing an unnecessary strain on the organizations.

To remedy this situation, a revision has been proposed in the Finance Bill 2025 which stipulates that incomplete applications will not be treated as "specified violations," which means they will not automatically trigger rejections. This change is aimed at reducing the administrative burden on trusts by adopting a more lenient approach to the application process.

2. Extended Registration Validity for Smaller Trusts: From 5 to 10 Years

Registration under section 12AB of the Act used to be earlier granted for infinite duration, lacking regular compliance checks and potentially leading to exploitation of the provisions by the Charitable Trust. The Finance Act, 2020 introduced a new registration duration of 3 years for new trusts and 5 years for existing ones, requiring all existing trusts to reapply for a 5-year registration to ensure closer supervision of activities. This posed challenges for smaller trusts, facing the prospect of reapplying every 5 years, and for the CIT(Exemption), who had to process many applications annually.

The Finance Bill, 2025 proposes to extend the registration validity from 5 years to 10 years for trusts or institutions provided their income does not exceed Rs. 5 crores in the two years preceding the application year.

However, it is important to note that the proposed extension to a 10 year registration period under the Finance Bill, 2025, does not encompass two specific categories of charitable trusts delineated by sub-clause (vi) of section 12A(1)(ac) of the Act. These categories are trusts with provisional registration as per (vi)(A), and existing trusts formed before 01 April 2021, but registered for the first time under the new regime as per (vi)(B), which currently fall under a 5-year final registration period.

In the case of trusts covered under sub-clause vi(B), the registration is granted following an detailed inquiry by the CIT(Exemption). The exclusion of this category, i.e., sub-clause vi(B), from the extended 10-year registration period seems to be an oversight rather than a deliberate policy decision.

Redefining 'Specified Persons'

Sections 13(1)(c) and 13(3) of the Act are instrumental in overseeing the tax exemptions granted to trusts and institutions under sections 11 and 12. These sections are specifically structured to prevent the diversion of a trust's income or assets for the benefit of 'specified persons'.

Historically, the term 'specified persons' under section 13(3) of the Act encompassed any individual who made a substantial contribution to the trust, where 'substantial' was quantified as contributions exceeding fifty thousand rupees. This category also included a wide array of relatives as outlined in explanation 2 to section 13.

The broad and inclusive definition of 'relative' posed significant compliance challenges for trusts. For instance, if a donor contributed Rs 60,000, the trust was required to identify and document all the donor's relatives.

Recognizing the need for reform, the Finance Bill 2025 has put forth an amendment to section 13(3) of the Act. This amendment raises the threshold for a 'substantial contribution' from Fifty thousand Rupees to One lakh Rupees and importantly, it removes the relatives of the specified person from the definition.

It is crucial to note that this amendment selectively applies to the relatives of substantial contributors. Other relatives, specifically those of the author, founder, or trustees, remain within the ambit of 'specified persons' as per the existing provisions of the Act. This targeted change streamlines the compliance process for trusts with respect to substantial contributors while maintaining the necessary safeguards against the misuse of trust assets by closely related individuals who hold significant influence over the trust.

3. The Overlooked Aspects of Budget 2025 for Charitable Trusts

While the Finance Bill, 2025 has introduced certain positive changes for charitable trusts, there are a few areas where expectations were not met.  One such area is the time limit for loan repayment. The Finance Act of 2021 mandated that loans must be repaid within a five-year period. As the deadline approaches, there was an anticipation that the Finance Bill, 2025 would extend this timeline. Unfortunately, no amendment was made in this regard. This means that if a trust is unable to repay its loan within the stipulated time, the amount cannot be treated as an application of income, which could have tax implications for the trust.

Another aspect that was overlooked concerns the treatment of inter-trust donations. Post Finance Act 2023, when one trust donates to another, only 85% of that donation is considered as an application of income for the donor trust, even if the donee trust has applied 100% of its income. It was expected that the Finance Bill of 2025 would address this mismatch to allow for full recognition of such donations as an application of income. However, this issue remains unaddressed in the latest Finance Bill, 2025 leaving a gap in the harmonization of inter-trust financial activities.

4. Conclusion

The Finance Bill, 2025 brings positive changes for charitable trusts by simplifying compliance requirements. These updates create a more supportive environment for charitable organizations, allowing them to focus on their core mission. Overall, the emphasis on making tax compliance simpler is a major boon for charitable trusts.