Section 115TD of Income Tax Act: Tax on Accreted Income

Meaning and purpose of Section 115TD

Section 115TD is contained in Chapter XII-EB of the Income-tax Act, 1961. It imposes additional income-tax on the accreted income of a specified person when one of the statutory trigger events occurs. The charge applies in addition to the income-tax otherwise payable on total income.

The tax is levied at the maximum marginal rate. In practical terms, the provision is intended to tax the accumulated value built up in an exempt or tax-favoured charitable institution when that value ceases to remain within the permitted charitable framework in the circumstances specified by the section.

Who is a specified person under Section 115TD?

For Section 115TD, a specified person broadly includes:

• a fund, institution, trust, university, educational institution, hospital or medical institution falling within the specified sub-clauses of section 10(23C); and
• a trust or institution registered under section 12AA or section 12AB.

The statutory explanation also preserves the relevance of older registration under section 12A for this purpose.

When does tax on accreted income arise?

Section 115TD(1) identifies three principal events:

Where a trigger applies, accreted income as on the relevant specified date becomes chargeable to additional income-tax.

How is accreted income calculated?

Under section 115TD(2), accreted income is broadly the amount by which the aggregate fair market value of total assets of the specified person on the specified date exceeds its total liability, calculated under the prescribed valuation method.

The detailed valuation mechanism is prescribed by Rule 17CB of the Income-tax Rules, 1962. The rule prescribes valuation principles for different classes of assets and also identifies amounts that are not treated as liabilities for this computation. For example, corpus or capital funds, reserves or surpluses, contingent liabilities and certain provisions are excluded from the liability figure.

Assets that may be ignored

Section 115TD contains exclusions so that specified assets, together with related liabilities where applicable, are ignored while computing accreted income. These include qualifying assets directly acquired out of income of the nature referred to in section 10(1), certain assets acquired before registration or approval became effective where the relevant exemption benefit was not available, and qualifying assets transferred to another specified person within the permitted period in a dissolution case.

When is a specified person deemed to have converted?

Section 115TD(3) treats a specified person as converted into an ineligible form in specified circumstances. These include cancellation of the relevant registration or approval; modification of objects so that they no longer conform to registration conditions followed by failure to obtain the required fresh registration or approval; and failure to make certain applications for registration, re-registration or approval within the statutory period.

This makes compliance with section 12A and section 12AB registration requirements, and the corresponding section 10(23C) approval requirements where applicable, important for determining exposure under Section 115TD.

Payment of tax under Section 115TD

Section 115TD(5) requires the principal officer or trustee and the specified person to pay the tax to the Central Government within fourteen days from the applicable statutory event. The starting event differs depending on whether the case concerns cancellation, modification of objects, failure to apply, rejection of an application, merger or dissolution.

The tax on accreted income is payable even where no income-tax is otherwise payable on the specified person's total income. Once paid, it is treated as final payment of tax in respect of that accreted income, and no deduction is allowed for the income charged under Section 115TD or the tax paid on it.

Interest and assessee-in-default consequences

Section 115TE provides for simple interest at one per cent for every month or part of a month where the tax is not paid within the time allowed. Section 115TF contains the assessee-in-default and recovery consequences.

Important definitions in Section 115TD

Related provisions and official resources

Section 115TD should be read together with Rule 17CB and the related default provisions in Sections 115TE and 115TF. For the authoritative statutory text and current rules, refer to the Income Tax Department resources below.

• Income Tax Department - Section 115TD
• Income Tax Department - Rule 17CB
• Income Tax e-Filing Portal

This article is an explanatory guide. For a transaction, cancellation, merger, dissolution or registration issue, the applicable statutory text, rules, notifications and facts should be checked for the relevant assessment year.