Charitable institutions’ investment in MFs
Social welfare is the basic responsibility of the government. Charitable and Religious Trusts lessen this burden. This is the reason for massive tax concessions available to them. Income applied for predefined and declared charitable objectives is exempt from tax. Donors also get deductions from tax u/s 80G or 80GGA. if available.
As per Sec. 2(15), ‘Charitable purpose’ means relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife), preservation of monuments or objects of artistic or historic interest, promotion of sports and advancement of any other object of general public utility.
The essence of charity is selflessness. The beneficiaries must not be able to demand or claim any benefit. None of the objects should result in private gains. The beneficiaries should be the general public. Now, when it comes to investments, Sec. 111A (a) states — Where a capital asset is transferred and the whole or a part of the net consideration is utilised for acquiring another capital asset, then, the capital gains, to the extent of its utilisation shall be deemed to have been applied to charitable or religious purposes.
For better understanding, take the instance of a charitable trust which held a housing property donated to it in October 2007. It sold it for ` 8,50,000 in December 2017 and paid a brokerage of ` 10,000. The donor had purchased this property in 1979 for ` 50,000. On a donated property, the assessee can take the cost to the original holder or its FMV as on 1.4.2001 whichever is beneficial to the assessee, as the cost of acquisition. The FMV as on 1.4.2001 is found to be ` 1,00,000. The capital gains are:`
If the trust invests 5,86,075 in any eligible avenue, no tax on capital gains is payable. Lesser amount will attract proportional tax. What are these eligible avenues?
The current modes of investment available to trusts as per Sec. 11(5) of ITA are:
• Savings certificates issued by the central government, post office savings bank, scheduled bank or a co-operative society engaged in carrying on the business of banking.
• Debentures issued by, or on behalf of, any company or corporation in which both the principal and the interest are fully and unconditionally guaranteed by the central government or by a state government.
• Deposit in any public sector company or in any bonds issued by a financial corporation which is engaged in providing longterm finance for industrial development in India.
• Bonds issued by a public company in India carrying on the business of providing long-term finance for urban infrastructure and residential houses in India. • Immovable property. • Units issued under any scheme of mutual funds.
• Any transfer of deposits to the Public Account of India.
• Equity shares of a depository or in the equity share capital of a company.
• Shares of the NSD Corporation.
• Debt instruments issued by any Infrastructure Finance Company (IFC) registered with the RBI.
Of the above, it is obvious that Units of MFs, especially the equity-based ones give the highest returns. If the trustees do not have much risk appetite, they may turn to debt-based schemes, where the yield is slated to be lower than the equity-based schemes but higher than that of any other avenues listed above. The only care they have to take is to ensure that their investments are log-term, longer the better.
To an extent, the investment profile of charity organizations is very similar to pension funds. The National Pension Scheme allows investment up to 50% in equities. The trend of investing into mutual funds is more of a natural progression. Even though these are non-profit organizations, trust boards always show inclination to optimize their portfolio yields. There are many trusts that invest in shortterm liquid funds and FMPs. At the same time, they are very comfortable investing pure equity and balanced funds as well. Some funds even have 100% of their longterm corpus in equity mutual funds.
While trusts set up under the Indian Trust Act, can invest in MFs without any approval other than from their Board of Trustees, trusts registered in the states of Maharashtra, Gujarat, Madhya Pradesh, Tamil Nadu, Andhra Pradesh and Rajasthan need individual schemes to be accorded the status of ‘public security’ of charity commissioners of respective states.
Yes, investments in MFs are subject to market risks as per the Securities and Exchange Board of India (SEBI) diktat but past, though not any indication of future performance, indicates that the risk, especially for very long-term investors --- ‘Sahi Hai’.