The amendment to Section 13(3) of the Income Tax Act redefines substantial contribution, impacting how trusts manage transactions with donors to maintain tax exemption under Sections 11 and 12.
New Definition of Substantial Contribution
A contributor will be classified as a substantial contributor if:
- Their total contribution during the relevant previous year exceeds ₹1 lakh, OR
- Their aggregate contribution up to the end of the relevant previous year exceeds ₹10 lakhs.
- Relatives of such substantial contributors and business entities where they have a substantial interest are no longer considered ‘specified persons’ under Section 13(3).
Breakdown of the Criteria
- ₹1 Lakh Threshold: If a donor contributes more than ₹1 lakh at a time in a financial year, they immediately qualify as a substantial contributor for that year.
- ₹10 Lakh Aggregate Threshold: If cumulative contributions per month up to end of the relevant previous year exceed ₹10 lakhs, then donor is classified as a substantial contributor for that year.
Exclusion of Relatives and Associated Businesses
Previously, Section 13(3) included relatives of substantial contributors and concerns where such contributors held a substantial interest. This meant that trusts had totrack and report transactions involving not only the substantial donor but also their relatives and associated businesses, significantly increasing the compliance burden.
Under the new amendment:
- Relatives of substantial contributors are no longer considered specified persons under Section 13(3).
- Business entities where a substantial contributor has a significant stake are also excluded.
- This means that trusts no longer need to monitor or report financial transactions involving these individuals or businesses, significantly easing compliance.
Example Scenarios
- Single-Year Contribution Exceeding ₹1 Lakh
- A donor contributes ₹1.2 lakh in one instance in FY 2024-25 → They are classified as a substantial contributor for that year.
- Cumulative Contribution Crossing ₹10 Lakh Over Time
- A donor contributes ₹2 lakhs per month in FY 2024-25 → At the end of the year, total contributions reach ₹10 lakhs, making them a substantial contributor for that year.
Effective Date
These amendments will take effect from the 1st day of April, 2025.
