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.
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.
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.
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.
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.
In case of cancellation, you will have a chance to appeal in court.
Let’s now have a look at the tax obligations from various categories of income of a charitable trust:
| Category of income | Income subject to tax | Taxability |
|---|---|---|
| Donations/voluntary contributions | Voluntary contributions towards the clear goal of forming a collaborative corpus of trust or institution | Exempt* |
| Voluntary contribution without a clear direction | Certain 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 on | Taxable in the same manner as voluntary contributions (without specific direction) as above | |
| Income from property held under trust for charitable or religious purpose | Income applied for charitable or religious purpose in India | Exempt* |
| Income accumulated or set aside for the application towards charitable or religious purpose in India | Exempt* 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 interested | CBDT either by general or special order has directed that such income shall not be included in the total income of trust | Exempt* |
| Capital gain from an asset held under trust in whole | Net consideration is utilised fully for acquiring another capital asset | Entire 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 asset | Capital 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
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.
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.
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.
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.
However, if the charity fails to invest funds as specified, the funds are taxable as outlined below.
| Category of violation | Year 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. |
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.
Certain modes are barred from receiving any exemptions. These are as follows-
Additionally, charitable trusts are also barred from aiding specified individuals in the process of their charitable work. These exceptions include the following.
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.
