Charitable Trusts NGO Income Tax Benefits

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 benefiting 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.

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.

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.

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.