Running a charitable or religious trust comes with privileges — chiefly, the tax exemption under Sections 11 and 12. But the government expects transparency in return. When a trust starts acting like a private business or favors its insiders, that’s where Section 13(2) quietly steps in. It tells us when exactly those exemptions will be withdrawn.
Think of it as a guardrail: it doesn’t punish good work; it prevents misuse.
Why This Rule Exists
Over the years, some trusts began mixing charity with personal benefit — rent-free houses, loans to founders, inflated salaries. Such practices defeat the whole purpose of tax relief. So, Parliament inserted Section 13(2) to make sure charitable money stays charitable.
If the income or assets of the trust are diverted toward “specified persons,” the exemption under Section 11 or 12 simply disappears for that year.
Situations Where Exemption Is Denied
Section 13(2) can be applied to the following cases in which tax exemption is not allowed.
Let’s break them down one by one — in plain language.
- Lending Without Proper Interest or Security
If a trust lends money to a trustee, founder, or relative without taking proper security or charges minimal interest, the tax benefit goes out of the window. The logic is simple — a charitable organization cannot act like a personal bank.
- Property Given at Concessional Rent
Suppose a trust owns a building & allows one of its founders to stay there rent-free or at a token rent."
That’s misuse of property meant for public benefit, not private comfort. Such cases automatically fall under Section 13(2) violations.
- Paying More Than Fair Value
When a trust purchases goods or services from a related person at a higher price than the market rate, the excess payment is treated as indirect benefit. Similarly, paying unreasonably high salaries or commissions to trustees is not allowed.
Reasonable pay is fine — lavish pay isn’t.
Also Read: Who Are the “Specified Persons” & Why It Matters for Charitable Trusts?
- Selling Below Market Price
If trust property is sold or transferred to a connected person for less than market value, it shows favoritism.
The difference between the real worth & sale price is considered a benefit to that person — and the exemption for that year stands cancelled.
- Using Trust Assets for Personal Benefit
Even temporary use counts. A car, building, or equipment owned by the trust cannot be used by a trustee or family member for personal reasons. Whether or not the trust earns revenue from it, the act itself violates Section 13(2).
- Investment in Related Concerns
Investing trust funds in a company or business where any trustee or relative has a substantial interest is prohibited. Charity funds must never be mixed with private ventures — this rule keeps the line clear.
Who Exactly Are “Specified Persons”?
The term is wider than most think.
It covers —
- The author or founder of the trust,
- Any trustee, manager, or contributor,
- Relatives of such people, and
- Any concern where these individuals hold substantial interest.
Essentially, anyone who can influence the trust’s decisions falls under the radar.
The Cost of Violation
- Once a breach occurs, exemptions under Sections 11 & 12 are suspended for that year.
- The affected income becomes taxable at normal rates."
- In serious or repeated violations, the registration under Section 12AB can even be revoked.
So, one bad decision can cost years of hard-earned credibility.
An Example to Understand
Imagine a charitable trust running a hospital.
The managing trustee uses one floor of the hospital building as a personal guesthouse without paying rent.
Though the hospital continues serving patients, the exemption for that year will be denied because of this personal benefit.
Section 13(2) treats even small diversions seriously.
Also Read: Why Compliance Matters for Charitable Trusts
Section 13(1)(c) vs 13(2): The Link
- Section 13(1)(c) is the broad rule — “no benefit to specified persons.”
- Section 13(2) lists the actual acts that qualify as benefit."
- Think of 13(1)(c) as the principle & 13(2) as its examples.
Together, they ensure charity remains untouched by personal interest.
Why It’s a Good Thing
Some view these rules as harsh, but they protect honest organizations. When people donate, they expect every rupee to go toward social work, not trustees’ perks. Section 13(2) keeps public faith intact. It tells taxpayers, “Your donation is safe & properly used.”
Judicial and CBDT View
Courts have repeatedly upheld this intent. For instance, interest-free loans or below-market property transfers have been ruled clear violations.
At the same time, the CBDT clarified that genuine, reasonable payments for professional work are acceptable.
The idea isn’t to discourage trustees from working — it’s to prevent them from over-rewarding themselves.
How Trusts Can Stay Safe
- Keep transparent books & conduct annual audits.
- Avoid related-party transactions unless unavoidable — and then record them at market value.
- Document every rent, loan, or salary agreement.
- Review compliance every year before filing the return.
- File Form 10B properly; that’s the auditor’s confirmation of compliance.
Prevention is easier than facing scrutiny later.
Recent Compliance Trends
- The income-tax department now uses analytics to track unusual transactions in trusts.
- If your audit shows a loan to a trustee or missing rent receipts, expect a notice."
- Digital trails make it impossible to hide misuse.
That’s why regular internal reviews have become essential for every registered trust.
In Simple Words
Section 13(2) is not against charity; it’s against manipulation. If a trust operates transparently, pays fair value, and avoids personal gains, it has nothing to worry about. But the moment personal benefit creeps in, tax relief slips away.
Also Read: When a Charitable Trust Loses Its Tax Exemption for Personal Benefit
Quick Recap
- Section 13(2) defines the circumstances where exemptions under Section 11 & 12 would not be available for a trust.
- It can be applied to the following cases in which tax exemption is not allowed: lending without interest, concessional rent, overpayment, undervalued sale, misuse of assets, and related-party investments.
- Violations lead to loss of exemption, and repeated misuse can even cancel registration.
- Transparency = Tax relief Public trust.
Final Thought
The heart of every genuine charitable trust is purpose. Section 13(2) simply ensures that purpose doesn’t get diluted. Operate cleanly, record honestly, and your exemption remains intact. It’s that straightforward.
If your trust wants to stay compliant under Sections 11 to 13, we can help. Our CA team at CallMyCA.com guides NGOs & charitable institutions on audits, Form 10B filings, and exemption preservation.
Let’s make sure your noble work stays tax-free — and worry-free.
