The Income Tax Department has issued a fresh directive to public charitable trusts, requiring that all trust deeds clearly state that the trust is “irrevocable” and that its funds cannot be diverted for any purpose other than approved charitable objectives. Trusts that fail to meet this condition now face the risk of rejection of their registration or renewal applications, potentially losing vital tax benefits under the Income Tax Act.
The direction comes amid concerns that loosely drafted trust deeds may allow trustees or settlers to dissolve or redirect trust property, including shifting funds to private hands. Tax officials have recently begun rejecting several applications for renewal under Section 12A, triggering anxiety among NGOs, non-profits, and other charitable bodies.
Why the Irrevocability Clause Matters
Experts explain that a trust must be irrevocable so that its funds — often sourced from public donations — remain permanently dedicated to charitable purposes. If a settlor reserves the power to revoke the trust or reclaim contributions, the entity cannot be considered charitable under tax law.
“Many trust deeds are drafted in a way that allows trustees to transfer funds back to the settlor or to another body not aligned with the trust’s objectives. This violates the very nature of a charitable trust,” said chartered accountant Gautam Nayak, who advises numerous NGOs.
He noted that if even a slightest revocation possibility exists, the trust deed is automatically treated as revocable, leading to denial of tax benefits.
Concern Over Foreign Allocation of Funds
Authorities have also flagged a second area of non-compliance — provisions permitting use of trust funds outside India. There have been conflicting High Court rulings on whether a trust can be denied registration merely because its deed permits spending abroad.
While earlier jurisprudence required Central Board of Direct Taxes (CBDT) approval for any foreign charitable activity, newer judgments have held that unless actual foreign spending occurs without approval, registration cannot be denied simply on the basis of enabling clauses.
Nayak cautioned, however, that if a trust deed explicitly allows such spending without CBDT approval, authorities may consider it grounds for rejection. “Registration under Section 12A is the lifeline of any charitable organisation. Denial becomes a death sentence,” he said.
Renewal Rules Tightened Since 2020
Since 2020, non-profits have been required to periodically renew their registrations under Sections 12A and 80G. At each renewal cycle, they must:
- Disclose foreign donations received,
- File detailed annual activity and income reports,
- Demonstrate that funds are used solely for permitted charitable purposes,
- Show that no part of the income benefits trustees or related parties.
Failure in any of these compliances can result in cancellation of registration and withdrawal of tax reliefs.
Impact on Trust Operations
Legal advisors say the new scrutiny may particularly affect older trusts that have not updated their deeds for decades. Many such documents were drafted without stringent attention to revocability language or foreign spending restrictions.
According to Isha Sekhri, partner at Heraeus Sekhri Advisors LLP, “If the deed does not categorically declare the trust irrevocable, authorities will consider it revocable by default. This puts at risk not only renewal applications but also the trust’s ability to receive tax-deductible donations.”
She emphasized that trusts must urgently review their deeds and introduce amendments to ensure clarity on permanence of charitable purpose and limitations on fund deployment.
What This Means for Donors and the Sector
The insistence on an irrevocable clause and strict limits on foreign spending is aimed at preventing misuse of charitable vehicles. Donors who contribute expecting tax deductions under Section 80G also rely on the legal sanctity of such registrations.
However, experts warn that increased compliance burdens may create temporary disruptions for NGOs engaged in developmental, health, and educational work.
“Non-profits already face heavy regulatory oversight. Denial of 12A registration can cripple operations entirely,” said one Delhi-based NGO official.
Conclusion
With the I-T Department intensifying scrutiny, charitable institutions must revisit and amend their trust deeds to ensure:
- Trusts are categorically irrevocable,
- Funds cannot be diverted for non-charitable purposes,
- No clause permits foreign spending without CBDT approval.
As renewal deadlines approach, failure to comply could result in severe consequences — including loss of tax exemptions and ineligibility to receive donations.
