Corpus Fund – How this fund is created?, Taxability Detailed

Corpus Fund – How this fund is created?. Corpus funds are of utmost importance from the point of view of income tax. Corpus funds represent the permanent funds maintained by any trust or institute for day to day survival and maintenance of the organization.

Corpus Fund

Hence, corpus funds are not meant for the attainment of objectives and goals. They usually are not applied for the attainment of goals and objectives. Corpus fund is considered as capital and core of the trust or institution, which should be maintained permanently for its continuance and existence.

Corpus funds can be applied to purchasing the assets like land, building, etc. Similarly, it can also be invested or deposited as prescribed under section 11(5) of the Income Tax Act.

How these corpus funds are created? 

Corpus funds are created out of donations which are specifically directed towards corpus funds. In fact, for being eligible as corpus donation, any voluntary contribution needs to carry a written specific direction to that effect from the donor.

There is also another way to create corpus fund. The organization can create corpus fund from its internal accruals or surplus. The organization can create corpus fund from 15% of its income because only 85% is available for application towards charitable purposes.

Taxability

• It is clearly mentioned under section 12; that corpus donations are totally exempt from tax liability for the trust or institution which receives such donation. However, such corpus donations have to be disclosed in prescribed return or form, in the part where the exempt income of the trust or institution is required to be mentioned.
• However, the benefit of exempt corpus donations is available only for the registered institute and hence if the trust or institute is an unregistered organization, then corpus donations will not be exempt.
• Income from corpus fund is not exempt, For e.g., interest on corpus fund is liable for the tax. However, such interest income can be applied to charitable purposes, which can lead to tax saving.
• Trust may create corpus fund from its internal profits and surplus also. However, only 85% of income is eligible to be applied towards charitable purposes, and only 15% of income is available for accumulation and can be used for creating corpus fund by then trust or institution.
• Even if any box is kept for collection with the word written as a corpus, same shall not be considered as corpus donation. Since these boxes do not receive donations along with written direction; these do not come under corpus donation.

This holds practical in case of especially in the case of a charitable institution. This is because the institution may resort to this trick just to get this amount of voluntary contribution as exempt. However, without specific direction from the donor, voluntary contributions in the charity box, are not qualified as corpus donations.

• As per one case law, it is considered that interest on corpus funds will not be exempt on mutuality concept. The case law had facts as below.

The surplus amount in the hands of the assessee was for corporate members like banks, only with the intention to earn interest income. This clearly represents commercial purpose behind the activity, which means that interest received by the assessee is revenue receipt and is hence taxable in the hands of the assessee.

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