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Charitable Trusts NGO Income Tax Benefits

Have you always wanted to make a positive contribution to the world? Well, perhaps there will never be a better time than now to do so. Tax authorities allow tax exemptions on contributions to NGOs, trusts, and central and state relief funds. These are covered under the Section 80G of the Indian Income Tax Act, 1961. So, as they say, we are all a part of the life cycle. If you decide to make donations to the world this year, it will follow you home at the end of the year. Want to know how? In this article, we will cover the entire tax cycle in detail.

Formation of NGO

NGOs stand for non-governmental organisations. These are referred to as non-governmental organizations because the scope of their work is considered the moral duty of the government in theory. For example, an NGO providing education to needy children in rural areas which benefits the society immensely and can make way for a brighter future generation. However, due to constraint on resources, government entities cannot reach to all needy. Hence, the government encourages altruism on the part of citizens to help the needy through a collaborative effort.

According to the Supreme court ruling in the case of Andhra Chamber of Commerce, the word ‘Charity’ in charity trusts also denotes altruism. Hence, these are also liable for government aid and subsequent tax exemptions under Article 80G. The ruling in Supreme court defined altruism as simply benefitting others through both thought and action. Subsequently, collective efforts of individuals to help the needy with financial or other means is part of the core objectives of governments and continues to play an important role in defining tax codes like Section 80G.

Registration of Trust Under Section 12A

Registration of trust under Section 12A is a quite simple and straightforward procedure. However, you can experience delays due to the high number of applications. For availing this procedure, you will need to file an application with the jurisdictional commissioner of income tax.

Necessary Documents for registration

  • Copy of PAN card of the trust.
  • Form 10A.
  • Documents establishing the creation of the trust.
  • Two copies of trust accounts for a period of three years.
  • Copy of trust deed, registration certificate, in case of Section 8 company – copy of certificate incorporation, copy of AOA, MOA of company, and copy of memorandum of association of society.

The forms need to be filled in accordance to rule 17A of the income tax rules, and each document needs to be signed and stamped by the authorized signatory.

Procedure for Registration

Once you submit the application, the commissioner has to ensure that your trust is genuine. During this phase, he can ask for additional documents and information as he or she deems fit. Additionally, in case of refusal, you will get the option of a hearing before the final judgement is passed. Moreover, the time period for approval or rejection is six months since the submission time period.

Cancellation of Registration Granted Under Section 12A

In case of cancellation, you will have a chance to appeal in court.

Income Tax Benefits on NGO

Let’s now have a look at the tax obligations from various categories of income of a charitable trust:

Category of incomeIncome subject to taxTaxability
Donations/voluntary contributionsVoluntary contributions towards the clear goal of forming a collaborative corpus of trust or institutionExempt*
Voluntary contribution without a clear directionCertain forms of income like property are liable for taxation.
Anonymous donations to charities and trust which do not maintain a legal standard record of donors. Donation exceeding higher of: i) 5% of total donations received by trust or ii) Rs 1,00,000 Taxed at 30%
Anonymous donation received by a trust established wholly for religious and charitable purpose onTaxable in the same manner as voluntary contributions (without specific direction) as above
Income from property held under trust for charitable or religious purposeIncome applied for charitable or religious purpose in IndiaExempt*
Income accumulated or set aside for the application towards charitable or religious purpose in IndiaExempt* to the extent of 15% of such income. This means that at least 85% of income from the property is to be applied for charitable and religious purpose in India as above and balance 15% can be accumulated or set aside. [See below comment on 85%]
Income from property held under the trust created for a charitable purpose which tends to promote international welfare in which India is interestedCBDT either by general or special order has directed that such income shall not be included in the total income of trustExempt*
Capital gain from an asset held under trust in wholeNet consideration is utilised fully for acquiring another capital assetEntire capital gain is deemed to have been applied for charitable and religious purpose and hence is exempt*
Net consideration is utilised partially for acquiring another capital assetCapital gain utilised in excess of cost of old asset transferred is considered to have been applied for charitable and religious purpose and is exempt*

Only Charitable/ religious trust or institution registered under Section 12AA enjoys the exemption

Filing of Income Tax Return for NGO

Charity trusts or NGOs are expected to allocate at least 85% of its income to the said cause. These causes include religious as well as charitable ones. Major ones are as follows.

  • Education.
  • Relief of the poor.
  • Medical relief.
  • Yoga.
  • Environment conservation (this includes historical monuments, places of artistic interests among others).

Moreover, charitable institutions may require engaging in commercial activity in order to conduct their operations. For example, an orphanage for blind people may require employing the needy to produce handicrafts in order to provide them with boarding and housing. However, under the charitable act, such activities cannot constitute more than 20% of the yearly operation.

Income expenditure for repayment of the loan, for purchasing capital assets, donation to trust, and revenue expenditure registered is also treated as essential for charitable purposes and is hence exempted from tax.

Furthermore, the tax code does not define the term ‘religious purpose’ precisely. Hence, religious purposes largely refer to support and advancement of religious principles and its tenets. However, it is important to remember that this exemption available for all communities is only applicable to public trusts. It is not available to trusts which are privately owned.

What if 85% of income is not applied?

Trusts and NGOs can find it difficult to allocate 85% of their income held under the property to the needy. In some cases, this income still receives an exemption. For example, if the tax authorities deem the institution worthy regardless. For example, charities are often prone to receiving expected income with delays. If your charity or trust has received income late from the previous year, you might not have resources to allocate. In such cases, charities are looked at as exceptions and can receive the benefit of the doubt while filling for income.

If you wish to apply for the special exemptions, you will need to exercise your rights using Form 9A. These can be sent electronically with or without a digital signature. When you are submitting your tax returns under u/s 139(1), then Form 9A needs to be submitted along with it.

Accumulation of 85% of Income of Trust

Moreover, charities can also accumulate income for specified goals under the current tax laws. For example, some charities may need to acquire properties to serve the needy. These charities can set aside funds for the assigned activities in the following manner.

  1. These charities will be required to submit form no. 10. The form is a notice of accumulation of income by a trust or a charity institution. These forms are required to be submitted during the filing of income period and can be sent electronically.
  1. Accumulation of income requires mentioning the purpose and time frame within which the said income would be accumulated and used.
  1. Currently, the tax laws limit the accumulation for the period of 5 years. During these, the notice by courts or injunctions is separated as part of the tax code from the calculation of time periods.
  1. It is important to invest or deposit money in a specified mode in order to avail this exemption.

However, if the charity fails to invest funds as specified, the funds are taxable as outlined below.

Category of violationYear of taxation
If income is used for other purposes like commercial.Same year.
Investment of income does not follow the agreed or specified schedule.The year in which the income ceases as a future investment.
If the income is not applied or used during the 6-year period. 6th year.
Donations to trusts registered under section 10(23C) or 12AA.The same year.

Ways to Invest Accumulated Income

There are also many ways for trusts and NGOs to save and invest the accumulated income and gain tax benefits in the process. As mentioned earlier, NGOs or trusts can set aside over 85% of their income. However, doing so requires one of the following routes for saving and investment.

  • Investment through post office savings bank or co-operative banks or scheduled banks.
  • Investment in government UTI/ saving certificate.
  • Investment in security bonds or savings options issued by the state and central government.
  • Trusts can also invest in company debentures, provided they are completely or unconditionally guaranteed by the state or central government.
  • Investment in public sector company through deposits or investment.
  • Invest income in publicly traded companies or in bonds. These companies aid the growth of the country’s industrial development and financing them is seen as a long-term investment in the future.
  • The cases of no exemptions.

Certain modes are barred from receiving any exemptions. These are as follows-

  • Income from private religious trusts which do not benefit the public at large. If the entire income is generated from such institutions, it does not qualify for any tax exemptions.
  • The entire income of religious institutions or charitable trusts which comes from serving a particular community or caste.
  • If the entire income is generated by serving a specific person, it is also not liable for a tax exemption.
  • If the modes of investment and the due process are not followed as specified.
  • The value of educational services and medical services made available to a specified person through charitable trusts and religious institutions.
  • Unless business objectives are incidental to the objectives of the charitable trust or NGOs, the income generated from it is not liable from tax exemptions.

Additionally, charitable trusts are also barred from aiding specified individuals in the process of their charitable work. These exceptions include the following.

  • The founder of the charitable trust or author
  • Individuals who have contributed substantially to charitable trusts. In these cases, anyone who makes above Rs. 50,000 in contributions are barred from benefits in the same financial year.
  • People in charge of charitable trusts, including managers, founders, trustees, and others.
  • Family members of people associated with trusts and NGOs are also barred from benefitting if they make substantial contributions.
  • Any person who has a substantial interest among the various designated members and if their total contributions are greater than 50% of the total income.

Frequently Asked Questions

What is a “trust”?

Trust is defined as an obligation attached to ownership of property. It is expected to arise out of the confidence of the author in trustees. Additionally, under the income tax code, the definition widens to include general legal obligations, and it is expected to meet all legal requirements as defined.

How is income defined for a charitable institute or a trust?

Income is defined as broadly as possible within the bounds of tax code for charitable trusts. It will include the income of different authorities within organizations. Additionally, it will also include income from other sources such as capital gains, dividends, securities, etc. Donations usually form the largest chunk of income sources for charitable trusts. All these sources can receive exemptions in case the prescribed conditions are met.

Does the Income Tax Act, 1961 apply to all voluntary organizations in India?

Yes, Income Tax Act applies to all the organizations engaged in socio-economic development programmes. As long as these organizations are engaged in benefitting the public at large, the act will continue to apply for them.

Does the Income Tax Act, 1961 also apply to NGOs situated in the North East India or in Ladakh?

Yes.

Under what circumstances are NGOs exempted from filing income tax altogether?

All NGOs are required to file income tax under Section 12A. If in some cases, the total income does not fall within the chargeable tax income category, the NGOs can benefit from exemptions of income tax.

Can you please provide a brief description of the registration procedure for NGOs?

Individuals who wish to register a charitable organization need to file application form 10A. The application needs to be sent to the local commissioner, where the trust is located. Additionally, this application needs to be filed within the first year since the formation of the trust.

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