When a Charitable Trust Loses Its Tax Exemption for Personal Benefit - Section 13(1)(c)

Every charitable organization is built on trust. Donors give, expecting their money to serve a cause—not personal interests. But without boundaries, even noble intentions can slip. To avoid that, lawmakers introduced Section 13(1)(c)—a rule that ensures no part of a trust’s income or property benefits those who manage it.

It’s simple: the section protects genuine charity by disallowing self-enrichment behind the curtain of service.

How It Works

Under Sections 11 and 12, charitable & religious trusts enjoy income-tax exemption if funds are applied for charitable purposes. Yet the moment a trustee, founder, or relative receives more than reasonable benefit—say, through inflated payments or free use of property—the exemption evaporates.

So, Section 13(1)(c) acts as a watchdog. It doesn’t stop fair remuneration but draws a line where compensation turns into profit.

Who Exactly Falls Under This Section

The persons covered under Section 13(1)(c) of the Income Tax Act, 1961 include:

• The author or founder of the trust
• Trustees or managers responsible for its affairs
• Their relatives (spouse, children, siblings, etc.)
• Significant donors who contribute ₹50,000 or more in a year"
• Any company or firm where these persons have substantial interest

By covering such a wide circle, the law ensures no backdoor advantage escapes scrutiny.

Payments Made to Trustees in Professional Capacity

This part often confuses people. The law does not ban every payment to trustees. It only questions those that look unjustified.

If a trustee is a doctor and runs the trust’s charitable hospital, paying for those services is fine—provided the fee matches market value. Similarly, a lawyer-trustee can be compensated for legitimate legal work. But if the payment is far higher than normal charges, the law treats it as a personal benefit and withdraws the trust’s tax exemption.

Also Read: Tax Treatment of Charitable Trusts & Institutions

How Authorities Judge Reasonableness

There’s no fixed formula, but officers compare rates & nature of work with what independent professionals charge. They look at the trust’s size, income, and overall context.

Example: If a trust pays ₹20 lakh to a trustee for bookkeeping while outside firms charge ₹4 lakh, the extra ₹16 lakh is viewed as benefit under Section 13(1)(c). The trust then loses its exemption for that year.

Common Violations

1. Paying trustees hefty “consultancy” or “management” fees.
2. Renting property from a trustee’s family at inflated rates.
3. Granting loans to trustees or relatives interest-free.
4. Purchasing supplies from a trustee-owned company without market comparison.

Even one of these can invalidate a year’s tax benefit & invite penalties.

Judicial Guidance and Interpretation

Courts have repeatedly balanced fairness with reality. In Kamla Town Trust v. CIT (1996), the Supreme Court noted that reasonable compensation for genuine work is allowed. But in cases where the payment was clearly inflated or the transaction lacked transparency, the benefit was rightly denied.

This principle still guides today’s tax assessments: transparency first, personal gain never.

Link with Other Sections

Section 13(1)(c) is closely tied to Sections 11, 12, and 13(2). Section 11 grants the exemption, while 13(2) lists specific transactions—like interest-free loans or use of trust property—that automatically trigger 13(1)(c). Together, they form a clear compliance chain: earn, spend on charity, disclose everything.

Practical Example

Consider a charitable school run by a trustee who owns a construction firm. The trust hires his firm to build new classrooms at a price 30 % above market rate without any tender. Though the work is real, the excess payment qualifies as benefit to a specified person. Result: loss of exemption for that financial year.

The lesson is clear — keep arm’s-length transactions & support them with documents.

Also Read: Registration & Tax Benefits for Charitable Trusts

Staying Compliant

For charitable organizations, compliance isn’t just about law—it’s about credibility.
To stay safe:

• Benchmark all professional fees to market standards.
• Approve related transactions through board resolutions.
• Disclose each payment to specified persons in audit reports.
• Get annual audits done by independent CAs.
• Avoid any deal where trustees or their relatives hold hidden interests.

A little paperwork today can save massive penalties tomorrow.

When Payments Are Permitted

The law recognizes that trustees often bring skills to the table. For example:

• A trustee-doctor running a hospital can receive reasonable consultation fees.
• A trustee-lawyer can bill for drafting legal agreements.
• Rent for trustee-owned premises is allowed if priced at market value.

Everything comes down to documentation & intent.

Consequences of Non-Compliance

If the Assessing Officer finds a breach of Section 13(1)(c), the trust’s entire income for that year is taxed at the maximum marginal rate. Beyond tax liability, the organization’s image suffers—donors lose confidence, and future registrations under Section 12AB or 80G become difficult."

Hence, financial prudence is not optional; it’s essential for survival.

Compliance Checklist

Following these steps keeps charitable institutions both compliant & credible.

Also Read: Tax Exemption for Charitable Organizations

Key Takeaways

• Section 13(1)(c) ensures that funds of a charitable trust aren’t used for personal advantage.
• It identifies the persons covered under Section 13(1)(c) of the Income Tax Act, 1961 & sets limits on benefits.
• Payments made to trustees in professional capacity are valid only if reasonable.
• Breaches lead to loss of tax exemption and potential penalties.

Conclusion

Section 13(1)(c) is more than a tax rule — it’s a moral code for charitable trusts. It reminds every organization that charity & self-interest cannot coexist.

If you run a trust or manage donations, ensure every transaction is transparent and documented. And if you need expert help navigating tax compliance, filing returns, or preparing Form 10B, visit CallMyCA.com — our CAs will guide you through India’s trust regulations with zero stress & maximum clarity.