(Section 115TD) of Income Tax Act
(Section 115TD) of Income Tax Act
What is Trust Exit Tax under Section 115TD?
What is Trust Exit Tax under Section 115TD?
A society or a company or a trust or an institution carrying on charitable activity may voluntarily wind up its activities and dissolve or may also merge with any other charitable or non-charitable institution, or it may convert into a non-charitable organization. Before the introduction of section 115TD there was no provision in the Income-tax Act which ensured that the corpus and asset base of the trust accreted over period of time, with promise of it being used for charitable purpose, continues to be utilized for charitable purposes and is not used for any other purpose.
The Finance Act 2016 has brought in a new chapter after Chapter XII-EB of the Income-tax Act, with effect from the 1st day of June, 2016, namely “Special provisions relating to tax on accreted income of certain trusts and institutions” and introduced a section 115TD. This chapter is introduced to ensure that the benefit conferred over the years by way of exemption claimed by charitable trusts is not misused by converting it into non-charitable organization.
It is a levy in the nature of an exit tax. Section 115TD prescribes circumstances under which exit tax is leviable. This tax is in addition to income-tax chargeable in hands of entity and leviable at the maximum marginal rate on the accreted income. No deduction under any other provision of this Act shall be allowed to the trust or the institution or any other person in respect of the income which has been charged to tax or the tax thereon.
When does section 115TD applies?
When does section 115TD applies?
Section 115TD accreted income of the trust or institution is taxable in the below circumstances:
1) Trust is converted into any form which is not eligible for grant of registration under section 12AA. Trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA:
i) The registration granted to it under section 12AA has been cancelled or
ii) Trust has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it:
- has not applied for fresh registration under section 12AA in the said previous year.
- has filed application for fresh registration under section 12AA but the said application has been rejected.
2) Trust is merged with an entity which is not having similar objectives and not registered u/s 12AA.
3) Trust failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or approved u/s 10(23C) within a period of twelve months from the end of the month in which the dissolution takes place
What is the rate of tax on accreted income u/s 115TD?
What is the rate of tax on accreted income u/s 115TD?
Section 115TD read with Rule 17CB provides for computation of net assets value of the Trust. Tax on accredited income is computed on the market value of net assets of the Trust. Tax on accreted income is to be paid at the ‘Maximum Marginal Rate’ (MMR). This levy is in addition income-tax chargeable in hands of Trust. With the highest surcharge of 37%, the effective peak MMR comes to 42.744% from the AY 2020-21.
What is due date of payment of exit tax u/s 115TD?
What is due date of payment of exit tax u/s 115TD?
The trust or institution shall be liable to pay the tax on accreted income to the credit of the Central Government within fourteen days from the date specified in section 115TD(5).
Tax and Interest payable Timeline
(i) “Date Specified” means as follows,
| Scenario | Date of Payment |
| Cancellation of Registration | No appeal filed – Expiry of time allowed u/s 253 Appeal filed – Date of receipt of order by trust |
| Adoption or Modification of objects and not applied for fresh registration | End of the Previous Year |
| Adoption or Modification of objects and not applied for registration but application gets rejected | No appeal filed – Expiry of time allowed u/s 253 Appeal filed – Date of receipt of order by trust |
| Merger | Date of Merger |
| Dissolution | Date of expiry of 12 months |
What is the Method of Calculation of Accreted Tax?
What is the Method of Calculation of Accreted Tax?
Method of Calculation of Accreted Tax is as follows:
This levy is in addition income-tax chargeable in hands of entity and is calculated as below:
Accreted Tax = Accreted Income * Maximum Marginal Rate (42.744% for AY 2020-21)
Meaning of Accreted Income:
| Aggregate FMV of the total assets as on the specified date | XXX |
| Less: Total liability of such trust computed as per the prescribed method of valuation | (XXX) |
| Accreted Income | XXXX |
Calculation of FMV of assets
Part A – Assets:
For the purpose of section 115TD, the aggregate FMV of the total assets of the trust or institution, shall be the aggregate of the FMV of all the assets in the balance sheet as reduced by-
(i) any amount of TDS/ TCS or advance tax payment as reduced by the amount of income- tax claimed as refund under the act, and
(ii) Any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset.
FMV of Assets
FMV of Assets
1. Quoted Shares and Securities: average of lowest and Highest price on valuation date on a recognizes stock exchange.
Note: If no trading of such shares and security on valuation date then average of lowest and highest price of immediately preceding the valuation date when such shares and security traded in recognize stock exchange
2: Unquoted Equity Shares:
A+B-L X PV
PE
Notes:
A = Book value of all assets (Other than covered in B) exclude TDS, advance tax in excess of income tax refund claimed and deferred expenditure shown in the asset side
B= FMV of bullion, jewellery, precious stone, artistic work, shares, securities and immovable property as determined in the manner provided in this rule
L= Book value of liabilities, but not including the following amounts, namely:-
(i) The paid- up capital in respect of equity shares.
(ii) The amount set apart for payment of dividends on preference shares and equity shares.
(iii) Reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation.
(iv)Any amount representing provision for taxation, other than amount of income tax paid, if any less than the amount of income tax claimed as refund, if any to the extent of the excess over the tax payable.
(v)Any amount representing provisions made for unascertained liabilities.
(vi)Any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preferences shares.
PE= Total amount of paid up equity share capital as shown in the balance sheet
PV= The paid up value of such equity shares
3. Unquoted shares or security date on the basis of valuation report of merchant banker or an accountant.
4. Immovable Property:
(i) SDV on Valuation date XXX
(ii) FMV/ NRV on valuation date XXX
Whichever is higher
5. A business undertaking: (A+B-L)
6. Any other assets: FMV/ NRV on valuation date
Part B- Liabilities
Total liability of the trust or institution shall be the book value of liabilities in the balance sheet on the specified date but not including the following amounts, namely:-
(i) Capital fund or accumulated funds or corpus, by whatever name called.
(ii) Reserves or surpluses or excess of income over expenditure, by whatever name called.
(iii) Any amount representing contingent liability
(iv)Any amount representing provisions made for meeting liabilities, other than ascertained liabilities
(v)Any amount representing provision for taxation, other than amount of TDS/ TCS or as advance tax payment as reduced by the amount of income tax claimed as refund under the act, to the extent of the excess over the income tax payable
What is the consequence in case of late payment of exit tax u/s 115TD?
What is the consequence in case of late payment of exit tax u/s 115TD?
As per section 115TE, If the principal officer or trustee or the institution and the trust fails to pay the whole or any part of the tax on the accreted income referred in section 115TD (1), within the time allowed u/s 115TD (5), simple interest at the rate of one per cent for every month or part thereof on the amount of such tax will be payable.
The Period of Interest shall be calculated from beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.
Lets Dive Into Section Wise Explanation:
Accreted income of Trust or Institution to be Taxed at the Maximum Marginal Rate (MMR) in certain cases [Section 115TD(1)]:
Meaning of Accreted Income in case of Charitable Trust [Section 115TD(2)]:
When the Trust or an Institution shall be deemed to have been Converted into any Form not eligible for Registration under Section 12AA [Section 115TD(3)]:
Tax on the Accreted Income to be payable even if no Income-tax is payable on Total Income of the Trust or Institution [Section 115TD(4)]:
Time Limit for Payment of Tax on Accreted Income [Section 115TD(5)]:
Credit of Tax Paid on Accreted Income Not Available [Section 115TD(6)]:
Deduction under any Other Provisions of the Act not Allowed in respect of Income Charged or the Tax Paid as per Section 115TD(1) [Section 115TD(7)]:
Section 115TD is inserted with effect from June 1, 2016. This section provides for levy of additional income-tax in case of conversion into, or merger with, any non-charitable form or on transfer of assets of a charitable organisation on its dissolution to a non-charitable institution. The elements of the regime are—
1. Accreted income of Trust or Institution to be Taxed at the Maximum Marginal Rate (MMR) in certain cases [Section 115TD(1)]:
1. Accreted income of Trust or Institution to be Taxed at the Maximum Marginal Rate (MMR) in certain cases [Section 115TD(1)]:
Notwithstanding anything contained in this Act, where in any previous year, a trust or institution registered under section 12AA has—
converted into any form which is not eligible for grant of registration under section 12AA;
merged with any entity other than an entity which is a trust or institution having objects similar to it and registered under section 12AA; or
failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via), within a period of 12 months from the end of the month in which the dissolution takes place,
then, in addition to the income-tax chargeable in respect of the total income of such trust or institution, the accreted income of the trust or the institution as on the specified date shall be charged to tax and such trust or institution, as the case may be, shall be liable to pay additional income-tax (herein referred to as tax on accreted income) at the maximum marginal rate on the accreted income.
2. Meaning of 'Accreted Income' of Charitable Trust or Institutions [Section 115TD(2)]:
2. Meaning of 'Accreted Income' of Charitable Trust or Institutions [Section 115TD(2)]:
The accreted income for the purposes of section 115TD(1) means the amount by which the aggregate fair market value of the total assets of the trust or the institution, as on the specified date, exceeds the total liability of such trust or institution computed in accordance with the method of valuation as may be prescribed.
Certain Assets and Liabilities to be ignored for the purpose of computing the Accreted Income of Charitable Trust or Institutions :
Certain Assets and Liabilities to be ignored for the purpose of computing the Accreted Income of Charitable Trust or Institutions :
The following assets and liabilities shall be ingnored for the purpose of computing the accreted income:
So much of the accreted income as is attributable to the following asset and liability, if any, related to such asset shall be ignored for the purposes of section 115TD(1), namely:—
any asset which is established to have been directly acquired by the trust or institution out of its income of the nature referred to in section 10(1) (i.e agricultural income);
any asset acquired by the trust or institution during the period beginning from the date of its creation or establishment and ending on the date from which the registration under section 12AA became effective, if the trust or institution has not been allowed any benefit of sections 11 and 12 during the said period.
While computing the accreted income in respect of a case referred to in clause (c) of section 115TD(1) above (i.e. transfer upon dissolution), assets and liabilities, if any, related to such asset, which have been transferred to any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv), (v), (vi) or (via), within the period specified in the said clause, shall be ignored.
3. When the Trust or an Institution shall be deemed to have been Converted into any Form not eligible for Registration under Section 12AA [Section 115TD(3)]:
3. When the Trust or an Institution shall be deemed to have been Converted into any Form not eligible for Registration under Section 12AA [Section 115TD(3)]:
For the purposes of section 115TD(1), a trust or an institution shall be deemed to have been converted into any form not eligible for registration under section 12AA in a previous year, if,—
the registration granted to it under section 12AA has been cancelled; or
it has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it,—
has not applied for fresh registration under section 12AA in the said previous year; or
has filed application for fresh registration under section 12AA but the said application has been rejected.
4. Tax on the Accreted Income to be payable even if no Income-tax is payable on Total Income of the Trust or Institution [Section 115TD(4)]:
4. Tax on the Accreted Income to be payable even if no Income-tax is payable on Total Income of the Trust or Institution [Section 115TD(4)]:
Notwithstanding that no income-tax is payable by a trust or the institution on its total income computed in accordance with the provisions of this Act, the tax on the accreted income under section 115TD(1) shall be payable by such trust or the institution.
5. Time Limit for Payment of Tax on Accreted Income [Section 115TD(5)]:
5. Time Limit for Payment of Tax on Accreted Income [Section 115TD(5)]:
The principal officer or the trustee of the trust or the institution, as the case may be, and the trust or the institution shall also be liable to pay the tax on accreted income to the credit of the Central Government within 14 days from,—
the date on which,—
the period for filing appeal under section 253 against the order cancelling the registration expires and no appeal has been filed by the trust or the institution; or
the order in any appeal, confirming the cancellation of the registration, is received by the trust or institution,
in a case referred to in clause (i) of section 115TD(3);
the end of the previous year in a case referred to in sub-clause (a) of clause (ii) of section 115TD(3) (i.e. the trust has not applied for fresh registration under section 12AA in the said previous year);
the date on which,—
the period for filing appeal under section 253 against the order rejecting the application expires and no appeal has been filed by the trust or the institution; or
the order in any appeal, confirming the cancellation of the application, is received by the trust or institution,
in a case referred to in sub-clause (b) of clause (ii) of section 115TD(3);
the date of merger in a case referred to in clause (b) of section 115TD(1);
the date on which the period of 12 months referred to in clause (c) of section 115TD(1) expires.
6. Credit of Tax Paid on Accreted Income Not Available [Section 115TD(6)]:
6. Credit of Tax Paid on Accreted Income Not Available [Section 115TD(6)]:
The tax on the accreted income by the trust or the institution shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the trust or the institution or by any other person in respect of the amount of tax so paid.
7. Deduction under any Other Provisions of the Act not Allowed in respect of Income Charged or the Tax Paid as per Section 115TD(1) [Section 115TD(7)]:
7. Deduction under any Other Provisions of the Act not Allowed in respect of Income Charged or the Tax Paid as per Section 115TD(1) [Section 115TD(7)]:
No deduction under any other provision of this Act shall be allowed to the trust or the institution or any other person in respect of the income which has been charged to tax under section 115TD(1) or the tax thereon.
