For charitable and religious trusts in India, maintaining tax-exempt status requires strict adherence to how funds are handled. Under the Income Tax Act, if a trust accumulates income for future use (up to five years) or receives voluntary contributions intended for its permanent fund (corpus), that money must be invested or deposited in specific ways. These approved “forms and modes” are detailed in Section 11(5) of The Income Tax Act, 1961.
Approved Investment and Deposit Modes
The law provides a specific list of safe and regulated avenues where a trust can keep its accumulated funds:
- Government Savings and Securities: This includes investments in savings certificates as defined by the Government Savings Certificates Act, 1959, and any other securities or certificates issued by the Central Government under its Small Savings Schemes. It also covers any other securities created and issued by the Central or State Governments.
- Banking and Post Office Accounts: Money can be deposited into any account with the Post Office Savings Bank. It can also be held in a scheduled bank or a co-operative society engaged in banking (such as a co-operative land mortgage or development bank).
- Unit Trust of India (UTI): Trusts are permitted to invest in units of the UTI.
- Guaranteed Debentures: A trust may invest in debentures issued by a company or corporation, provided that both the principal amount and the interest are fully and unconditionally guaranteed by either the Central or a State Government.
- Public Sector Companies: Investment or deposit in a public sector company is allowed. If such a company loses its “public sector” status, investments in its shares remain valid for three years, while other deposits remain valid until they are repayable.
- Long-term Finance Bonds: Funds can be placed in bonds issued by financial corporations or public companies that provide long-term finance (loans for 5 years or more) for specific purposes:
- Industrial development in India.
- Construction or purchase of houses in India for residential purposes.
- Urban infrastructure, which includes projects like potable water supply, sanitation, roads, bridges, and solid waste management.
- Immovable Property: Investment in immovable property is an approved mode. However, this does not include machinery or plant, unless they are installed in a building specifically for the convenient use of that building.
- IDBI Deposits: Deposits made with the Industrial Development Bank of India (IDBI) are recognized.
- Other Prescribed Modes: The government may prescribe additional forms or modes of investment in the future.
Why These Modes Matter
Following these rules is essential for a trust’s financial health. If a trust chooses to accumulate income but fails to invest it in these specific modes, that money will be deemed taxable income for the year it ceases to be properly invested.