Non-Governmental Organizations (NGOs) and trusts play a vital role in contributing to the welfare of society through charitable and philanthropic activities. Navigating the intricate landscape of legal and financial terms related to these entities is essential for their effective functioning. This comprehensive guide aims to shed light on key terms associated with NGOs and trusts, providing insights into their implications and significance.
- Accreted Income :
Under Section 115TD, when a trust converts into a non-charitable form or transfers assets to a non-charitable institution, it becomes liable to pay additional income tax on the accreted income. This income is taxed at the maximum marginal tax rate, distinct from the income-tax charged on the trust or institution. Accreted income is the fair market value of the total assets of the trust minus total liabilities on a specified date.
- Accumulation of Income :
If the income applied for charitable or religious purposes during the previous year falls short of 85%, the unspent amount can be deemed as applied if the trust declares it to the Assessing Officer and invests the surplus according to Section 11(5). This retaining of a part of the income is termed the accumulation of income.
- Anonymous donation :
Anonymous donation refers to a voluntary contribution where the recipient does not maintain records of the donor’s identity, including name, address, and other prescribed particulars.
- Application of income :
The application of income encompasses all payments and expenditures for charitable and religious purposes in India. Section 11 provides exemptions to trusts for income applied to such purposes. Any application for non-charitable purposes may attract taxation under Section 115BBI.
- Charitable purpose :
Section 2(15) of the Income-tax Act provides an inclusive definition of ‘charitable purpose.’ It includes relief of the poor, education, yoga, medical relief, preservation of the environment, preservation of monuments or places of artistic or historic interest, and the advancement of any other object of general public utility. It includes the following:
a) Relief of Poor;
b) Education;
c) Yoga;
d) Medical Relief;
e) Preservation of the environment (including watersheds, forests, and wildlife);
f) Preservation of monuments or places or objects of artistic or historic interest; and
g) Advancement of any other object of general public
- Compliances required for tax audits :
Trusts required to undergo a tax audit must do so by obtaining an audit report in Form 3CA and 3CD, or Form 3CB and 3CD for others. The report must be filed one month before the due date for furnishing the return of income under Section 139(1):
| Situations | Due date for filing of tax audit report |
| If assessee is required to furnish a report of transfer pricing (TP) in Form No. 3CEB | On or Before 31st October of the relevant assessment year |
| In any other case | On or Before 30th September of the relevant assessment year |
- Corpus donation :
Corpus donation means any voluntary contributions received by a trust or an institution, created wholly for charitable or religious purposes, with a specified direction that they shall form part of the corpus of the trust or institution.
- Deduction :
The income chargeable to tax due to withdrawal of exemption shall be computed after allowing a deduction for expenditure (other than capital expenditure) incurred in India for the objects of the institution. The deduction is allowable subject to the satisfaction of the following conditions:
a) The expenditure is not from the amount of corpus donations credited in the books of account up to the end of the financial year immediately preceding the relevant previous year;
b) The expenditure is not from any loan or borrowing;
c) Depreciation shall not be allowed in respect of an asset whose full cost has been claimed as an application of income;
d) The expenditure is not in the form of a contribution or donation to any person.
However, the income shall be computed without deduction of the following expenditures:
a) No deduction shall be allowed for the capital expenditure;
b) Disallowance shall be made under Section 40(a)(ia) for the default made in deduction of tax;
c) Disallowance shall be made Section 40A(3)/40A(3A) for the payment made in cash;
d) No deduction shall be allowed for the expenditure not incurred in India.
- Exemption :
Section 11 provides an exemption to trust or institution in respect of income derived from property held under trust and voluntary contribution subject to various conditions:
a) The property from which the income is derived should be held under the trust;
b) The property should be held for charitable or religious purposes;
c) No part of the income or the property of the trust should be used or applied directly or indirectly for the benefit of certain specified persons;
d) The trust should be registered with the Commissioner within the prescribed time under Section 12AB;
e) Where the income of trust consists of a business income, the business should be incidental to the attainment of the objectives of the trust, and separate books of account are maintained in respect of such business;
f) The accounts of the trust should be audited and the audit report should be furnished in Form 10B or 10BB at least one month prior to the due date of submission of return of income; and
g) The funds of the trust should be invested or deposited in the permissible forms and modes only.
- Interested Person :
Section 13 of the Income-tax Act restricts exemption to a charitable or religious trust to the extent of the income applied for the benefit of an interested person. The following persons are categorised as ‘interested person’:
a) The author of the trust or the founder of the institution;
b) Any person who has made a total contribution up to the end of the relevant previous year of an amount exceeding Rs. 50,000;
c) Where the author, founder, or substantial contributor is a HUF, a member of the HUF;
d) Any trustee of the trust or manager of the institution;
e) Any relative of such author, founder, substantial contributor, member, trustee, or manager as aforesaid; and
f) Any concern in which any of the persons referred to above has a substantial interest.
- Permissible mode :
“Permissible mode” refers to the ways in which a charitable or religious trust can utilize its income without losing its tax-exempt status. The permissible mode has been specified under section 11 of the Income-tax Act
- Public charitable trusts :
Public charitable trusts is a trust whose beneficiaries are the public at large
- Registration :
Any trust or institution can claim exemption under Sections 11 and 12 if it is registered with the Commissioner of Income-tax. Registration under the new provision is allowed for a maximum of 5 years. The application for registration in such cases shall be filed in Form 10AB. After making necessary enquiries, the Commissioner is required to pass an order granting the registration or refusing to grant the registration within 6 months from the end of the month in which the application for registration was received.
- Relative :
For the purpose of section 13, relative in relation to an individual means:
(a) Spouse of the individual;
(b) Brother or sister (and their spouses) of the individual;
(c) Brother or sister (and their spouses) of the spouse of the individual;
(d) Any lineal ascendant or descendant (and their spouses) of the individual;
(e) Any lineal ascendant or descendant (and their spouses) of the spouse of the individual;
(f) Any lineal descendant of a brother or sister of either the individual or of the spouse of the individual.
- Section 8 Companies :
Section 8 companies are registered under the Company Act, 2013. These companies are formed for a charitable purpose.
- Specified Violation :
Section 12AB defines the meaning of ‘Specified Violation’ which is as follows:
a)Application of income other than for the objects;
b)Income from business not incidental to the objects;
c)Separate books not maintained for business incidental to the objects;
d)Application of income not for benefit of the public;
e)Application of income for the private religious community;
f)Activities of trust are not genuine; and
g)Non-compliance with requirements of other law.
- Substantial Interest :
For the purpose of section 13, a person is deemed to have a substantial interest in concern if he (or along with ‘interested persons’ as mentioned above) at any time during the previous year:
(a) Holds at least 20% of equity share capital, in case of a company; or
(b) Entitled to at least 20% of profits in the case of any other concern.
Navigating the realm of NGOs and trusts requires a nuanced understanding of these terms, ensuring compliance with legal and financial regulations. This guide serves as a valuable resource for trustees, administrators, and individuals involved in the philanthropic sector, fostering clarity and informed decision-making.
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