Section 13 of Income Tax Act 1961: When Sections 11 and 12 Exemption Is Denied
Updated: 27 September 2026
Section 13 of the Income-tax Act, 1961 sets out situations in which a charitable or religious trust or institution cannot claim, or may lose to the specified extent, the exemption otherwise available under sections 11 and 12. The provision covers private religious benefit, benefit to a particular religious community or caste in specified cases, benefits given to specified persons, and investments made outside permitted modes.
What does Section 13 mean?
Sections 11 and 12 of the 1961 Act provide tax exemption for qualifying income of charitable or religious trusts and institutions, subject to statutory conditions. Section 13 operates as a restriction on that exemption. In practical terms, a trust must not only apply its income for permitted charitable or religious purposes; it must also avoid prohibited private benefits and comply with the prescribed investment rules.
The effect of a violation depends on the particular clause. The current text of Section 13 includes provisions that limit denial to the relevant part of income or investment in specified circumstances, so the precise tax consequence should be determined from the applicable clause and assessment year rather than assuming that every breach automatically denies the entire exemption.
Section 13(1): cases where exemption is restricted
Private religious purposes - Section 13(1)(a)
Income from property held under a trust for private religious purposes is not protected by sections 11 and 12 where the benefit does not enure for the public.
Benefit of a particular religious community or caste - Section 13(1)(b)
For a charitable trust or charitable institution created or established after commencement of the 1961 Act, exemption is restricted where it is created or established for the benefit of a particular religious community or caste. The statutory explanation protects a trust or institution created or established for the benefit of Scheduled Castes, backward classes, Scheduled Tribes, or women and children from being treated as one created for the benefit of a religious community or caste merely on that ground.
Benefit to specified persons - Section 13(1)(c)
Section 13(1)(c) addresses income or property of a charitable or religious trust or institution that enures, or is used or applied directly or indirectly, for the benefit of a person covered by Section 13(3). Historic exceptions for certain pre-Act trusts and specified periods remain part of the provision.
Investments outside permitted modes - Section 13(1)(d)
Section 13(1)(d) restricts exemption where funds are invested or deposited otherwise than in the forms or modes permitted by Section 11(5), subject to the statutory exceptions and transitional rules.
Section 13(2): when income or property is deemed to benefit a specified person
Section 13(2) gives concrete examples of transactions that can be treated as direct or indirect use of trust income or property for a specified person. They include:
- loans without adequate security or adequate interest;
- use of land, buildings, or other property without adequate rent or compensation;
- salary, allowance, or other payment exceeding reasonable remuneration for services;
- services made available without adequate remuneration or compensation;
- purchase of shares, securities, or other property from a specified person for more than adequate consideration;
- sale of such property to a specified person for less than adequate consideration;
- diversion of income or property in favour of a specified person, subject to the statutory threshold; and
- investment of trust funds in a concern in which a specified person has a substantial interest.
Section 13(3): who is a specified person?
For the years governed by the 1961 Act, Section 13(3) identifies persons whose benefit can trigger Section 13(1)(c) and Section 13(2). Following the Finance Act, 2025 amendment, the list includes the author or founder; a substantial contributor meeting the revised contribution threshold; specified HUF members; trustees or managers; specified relatives; and concerns in which the relevant persons have a substantial interest.
For substantial interest, the 1961 Act uses a 20 per cent test: broadly, not less than 20 per cent voting power in a company or entitlement to not less than 20 per cent of profits in another concern, tested in the manner stated in Explanation 3 to Section 13.
Other important provisions of Section 13
| Provision | What it addresses |
|---|---|
| Section 13(4) | Limited relief where investment in a concern in which a specified person has substantial interest does not exceed 5 per cent of that concern's capital; the statutory consequence is confined as provided in the sub-section. |
| Section 13(5) | Historic transitional treatment of certain debentures acquired after 28 February 1983 but before 25 July 1991. |
| Section 13(6) | Protective rule concerning educational or medical facilities provided by qualifying charitable or religious trusts or institutions to certain persons specified in Section 13(3), subject to the provision. |
| Section 13(7) | Excludes anonymous donations taxable under Section 115BBC from the exemption under sections 11 and 12. |
| Section 13(8) | Addresses income where the statutory commercial-activity restriction linked to the definition of charitable purpose in Section 2(15) applies. |
| Section 13(9) | Links accumulation under Section 11(2) with timely furnishing of the prescribed statement and return of income under Section 139(1). |
Definitions relevant to Section 13
Trust
For the relevant provisions of the 1961 Act, the statutory explanation provides that "trust" includes any other legal obligation.
Relative
The explanation to Section 13 defines "relative" in relation to an individual and covers specified family relationships, including spouse, siblings, certain siblings of the spouse, lineal ascendants and descendants, and other relationships expressly listed in the provision.
Substantial interest
A person is treated as having substantial interest in a company or other concern when the statutory 20 per cent voting-power or profit-entitlement test is met, as applicable.
Income-tax Act, 2025: position from 1 April 2026
The 1961 Act was repealed for new tax years from 1 April 2026, although it continues to govern earlier years. Under the Income-tax Act, 2025, registered non-profit organisations are dealt with in a reorganised set of provisions rather than a direct renumbering of old Section 13.
| Income-tax Act, 2025 provision | Relevant subject |
|---|---|
| Section 337 | Defines "specified income" of a registered non-profit organisation. This includes income applied directly or indirectly for the benefit of a related person and investments or deposits made in contravention of the applicable investment provision. |
| Section 355(h) | Defines "related person", including the author or founder, specified contributors, certain HUF members, trustees or managers, specified relatives, and relevant concerns. |
| Section 355(n) | Defines "substantial interest" using the 20 per cent voting-power or profit-entitlement test. |
| Section 445 | Provides a penalty where specified income arises from application of income for the benefit of a related person, subject to the conditions in that section. |
Under Section 355(h)(ii) of the 2025 Act, the contribution threshold for a related person is more than Rs. 1 lakh during the relevant tax year or more than Rs. 10 lakh in aggregate up to the end of that tax year. The current rules also prescribe how income applied for the benefit of a related person is computed.
Practical compliance points for trusts and institutions
- Keep a current register of founders, trustees, managers, relevant contributors, relatives covered by the applicable law, and concerns in which relevant persons have substantial interest.
- Document loans, rent, remuneration, purchases, sales, services, and other related-person transactions with evidence supporting arm's-length or adequate consideration.
- Review investments and deposits against the permitted statutory modes before making or continuing them.
- Check the law applicable to the particular previous year or tax year. Do not apply the 1961 Act mechanically to a tax year governed by the 2025 Act.
- For an assessment, appeal, or proceeding relating to a year before 1 April 2026, continue to examine the applicable provisions of the 1961 Act and amendments effective for that year.
Official references
For the controlling text and current compliance position, use the official Income Tax Department materials:
- Income-tax Act, 1961 as amended by Finance Act 2025
- Finance Act 2025 highlights - charitable trusts and institutions
- Income Tax Department - Income Tax Act 2025
- Income-tax Act, 2025 - official text
This article is a general statutory guide. The applicable provision, amendment date, registration status, facts of the transaction, and relevant tax year should be checked before taking a tax position.