For social good and tax benefits

Even individuals can set up trusts for philanthropic work. But, the process can be time-consuming.

Trusts and not-for-profit foundations are often believed to be the bastion of the rich. The recent $2 billion-fund set up by Azim Premji to promote education at the grassroots level has hogged a few headlines. But even individuals can set up their own trusts. Gautam Dasgupta’s Footprints Foundation is one such trust, which was set up for terminally ill patients at the Tata Memorial Cancer Hospital.

“Many companies help patients when they are admitted. But once these patients go home, they have no aid,” says Dasgupta. He, therefore, set up a trust to assist such individuals. The foundation’s contributors are family and friends. He feels that formalising the set up has helped him discipline the process.

“Setting up a trust can help people get involved in the cause and ensure appropriate disbursal of funds. And, the best part, monitor the end-use of funds,” says Anil Harish, partner, D M Harish & Advocates.

Such trusts can also be formed to get government aid for specific purposes. For instance, Sunita Ranadive set up Vidyavardhini Shikshan Sanstha at Ambernath, Maharashtra, in 1971, when her home school could no longer accommodate the increasing number of students from the surrounding poor households. “We had to rent a place, plus employ additional teachers. As we didn’t have sufficient resources, seeking government aid was the only option,” says Ranadive.

Starting out
To begin with, you must define the geographical location of your work. This would determine whether your trust is registered as a ‘local estate charitable trust’, where the cause supported must be within a specific jurisdiction, or ‘all-India’, where it could be anywhere in the country. “For beginners, an all-India trust is usually not advisable. It poses several administrative hassles such as having seven trustees from seven different states in the country on board,” says Rajesh Narain Gupta, managing partner, S N Gupta & Co Advocates.

You can start out with any amount. The charges would include stamp duty that is calculated at three per cent of the first donation, registration fee up to Rs 25 and any fee you may have to pay to your legal counsel or chartered accountant. The deed by the trust must then be drawn up, giving details of the cause supported, trustees etc. There are no restrictions on the number of trustees. Your first donor, known as the ‘settler’, may or may not be inducted as a trustee.

The next step would be to approach the local ‘charity commissioner’ to register your trust. The charity commissioner would interview the chairman of the trust to ascertain its genuineness. “This interview mostly focuses on the objectives of the trust and how you plan to achieve them. There was no discussion about my financial status or my earnings,” says Dasgupta of his experience.

Taxation
After you have received the registration certificate from the charity commissioner, you can proceed to get the 12 A and 80G certificates from the Income Tax (I-T) department.

The former lets you claim an exemption on all earnings/donations of the trust. But there is a catch. Say your trust earned Rs 1 lakh this year, but you did not use the funds. You can carry these funds forward to the next year after informing the I-T office. However, if you fail to use the funds even the following year, the money would become taxable. “The idea is that a trust must spend the money it holds for charity. It cannot go on accumulating funds endlessly,” says Harish. But trusts can set aside funds for major capital expenditure up to five years, but only after informing I-T officials.

There are also several restrictions on avenues that trusts may choose to invest in. For instance, the law dictates that the trust’s funds cannot be invested in the stock market, or they cannot be loaned to any trustee. The funds can only be invested in government securities or fixed deposits.

An 80G certificate is optional. But if obtained, it will let the donors to your trust claim a deduction of 50 per cent of the donation made. “This is the biggest incentive, especially if you plan to rope in corporate donors. They prefer donating to trusts rather than individuals, as it helps them claim a tax deduction,” says Gupta.

“Cumulatively, it takes almost a year to get the registration done as well as the tax certificates. This could act as a deterrent. You need to be patient with the entire process,” adds Dasgupta.