Unregistered Trusts under the Income Tax Act, 1961

Legal Framework for Unregistered Trusts

1. Applicability of Section 12A - Applicability of Section 12A Section 12A of the Act applies exclusively to public charitable or religious trusts or institutions. Without such registration, exemption under "Sections 11 and 12" is not available.
2. Audit Requirements under Section 12A(1)(b) -  A trust must obtain an audit report in Form 10B if it claims exemption under "Sections 11 or 12" and if its total income (before such exemption) exceeds the basic exemption limit. However, this requirement does not extend to unregistered trusts.
3. Taxability of Unregistered Trusts -  If a trust is unregistered under section 12A/12AA  It is not eligible for exemption under Sections 11 or 12. It is taxable as an AOP (Association of Persons) under normal slab rates unless Section 164 applies.
4.  Section 164(1) - Indeterminate Beneficiaries In case of private trusts where beneficiaries are unknown or indeterminate, the income is taxable at the Maximum Marginal Rate (MMR).    
5. Audit Format Audit for such unregistered trusts -  if needed under any governing statute, must be as per SA-700 (ICAI format), not Form 10B.
6. Transfer of Funds to Unregistered Trusts - As per Explanation to Section 11(2) and Section 11(3)(d), accumulated income of a registered trust cannot be transferred to an unregistered trust.Such transfer is deemed to be application not for charitable purpose and is treated as income of the transferor trust.
7. Voluntary Contributions As per Section 2(24)(iia), - voluntary contributions are treated as income. Without Section 12A registration, such receipts are taxable under “Income from other sources.”
8. Allowability of Expenses -  Under Section 57(ii), expenses wholly and exclusively incurred for earning income (not being capital expenditure) are allowable even for unregistered institutions.   
9. Corpus Donations  -  Even if the trust is unregistered, corpus donations with specific directions are treated as capital receipts, hence not taxable (as per Bank of India Retired Employees Medical Assistance Trust v. ITO)
10. Violation of Section 13 -  Related Party Transactions Advances made to entities where trustees hold substantial interest (as per Explanation 3 to Section 13) result in denial of exemption under Section 11, read with Section 13(1)(c), 13(2)(a) and 13(3)(e).

Simple Explanation for Non-Lawyers 

1. What is an Unregistered Trust?

An unregistered trust is one that has not obtained registration under Section 12A/12AA of the Income Tax Act. Such registration is mandatory to claim income tax exemptions on donations or income applied for charitable purposes.

2. What Happens If It’s Not Registered?

If the trust is not registered:
It cannot claim tax exemption under Sections 11 and 12.
It will be taxed like a normal person or group (as an AOP).
It may still claim business expenses or deductions, but only under general tax rules.

3. Do They Need Audit?

No Form 10B audit is required.
If some law (like Trusts Act or Society Act) requires audit, then use a normal audit format (SA-700 by ICAI).

4. Can They Send Money to Other Trusts?

If a registered trust sends accumulated funds to an unregistered trust, it’s not allowed.
Such a transfer will be taxed as income of the donor trust.
Only current-year income (not accumulated) can be used that way, and even then, caution is needed.

5. Tax Treatment Examples

If a school is running as a charitable trust but not registered, its income will be taxed.
If it has expenses directly related to earning that income (like teacher salaries), it may still deduct those.
If it receives corpus donations (donations for a specific fund), those are not taxed, even if unregistered.

6. Special Case: Related Party Loans

If trustees lend money to another trust where they have control or a share, and that trust is unregistered, tax exemption is also denied due to conflict of interest.

7. What Can Be Done?

Best practice: Get the trust registered under Section 12A.
Avoid giving accumulated funds to other unregistered trusts.
Keep clean, purpose-specific books if income exceeds limits.

 Conclusion

Unregistered trusts lose the core benefits of being charitable institutions under the Income Tax Act. They face higher scrutiny, limited exemptions, and stricter compliance. It’s crucial for any genuine charitable trust to seek Section 12A registration to avoid adverse tax consequences and to qualify for tax exemptions on income used for public good.