When we think of charitable trusts, we often associate them with selfless work for the public good. But what if a trust starts favouring certain individuals through its financial dealings? That’s where Section 13(3) of the Income Tax Act steps in — to maintain transparency & accountability in the charitable sector.
This provision defines specified persons who, if financially benefited by the trust, can jeopardise the tax exemptions otherwise available under Sections 11 & 12. Let’s understand this in simple words.
What is Section 13(3) of the Income Tax Act?
Section 13(3) of the Income Tax Act deals with transactions by charitable trusts with specified persons. If a charitable or religious trust applies its income, or any part of its income or property, directly or indirectly for the benefit of certain related parties or specified persons, then the trust may lose its income tax exemption for that portion.
Who Are These “Specified Persons”?
The law provides a detailed list of who is considered a specified person under Section 13(3). These include:
- The author or founder of the trust
- Trustees or managers of the trust
- Relatives of the above individuals
- Any person who has contributed more than ₹50,000 to the trust in a financial year
- Any person who has a substantial interest in a concern where the trust has invested
- Any concern (company, firm, etc.) in which these people hold a substantial interest
These individuals & entities fall under the radar of transactions by charitable trusts with specified persons and are closely watched for benefit-related dealings.
Common Scenarios That Attract Section 13(3)
Here are examples where Section 13(3) might get triggered:
- A trust giving an interest-free loan to a trustee’s relative.
- Allowing a specified person to use trust property (like a building or vehicle) without proper compensation.
- Making investments in a business where a specified person is a stakeholder.
Such transactions can lead to denial of exemption for that income, or even full taxation of the trust’s income in serious cases.
Impact on Charitable Trusts
If found in violation of Section 13(3), a charitable trust may:
- Lose the exemption under Section 11 for the income misused
- Be subject to regular income tax as if it were any other entity
- Face legal scrutiny from tax authorities
This makes compliance with Section 13(3) of the Income Tax Act not just important, but mandatory for trusts that wish to retain their tax-exempt status.
Section 13(3)(b): A Deeper Glimpse
Often, people search for Section 13(3)(b) of the Income Tax Act. This sub-clause refers to one of the specified relationships & gives clarity on who exactly can be considered related or “specified” — helping authorities identify indirect benefit channels.
Why Was Section 13(3) Introduced?
This section acts as a firewall to ensure that charitable trusts stay true to their public welfare objectives & don’t turn into private benefit machines. It keeps both corruption & tax evasion in check.
Final Thoughts
To conclude, Section 13(3) of the Income Tax Act ensures that charitable & religious trusts function for society at large, not for the personal benefit of a few. If your trust is engaging with specified persons, make sure transactions are at arm’s length, properly documented, & well within the law.
💡 Need help reviewing your trust’s compliance under Section 13(3)? Book an expert consultation now at Callmyca.com & ensure your charitable objectives remain tax-safe and legally secure.
