FAQs Related to Income Tax Provisions of charitable trust and NGOs

FREQUENTLY ASKED QUESTIONS (FAQs)

Q.1 Are NGOs and other charitable and non-profit organizations entitled to claim tax exemption under income tax law in India? Are donors who contribute to such organizations also entitled to any tax deduction?

Ans. Yes, such exemption is available to, (i) public charitable trusts or other legal obligations, (ii) university or other educational institutions, (iii) hospital or other institutions for treatment of persons, (iv) research associations, (v) a company formed under Section 25 of the Companies Act. Grant of exemption in each case is, however, subject to fulfillment of a set of specified conditions.

Donors who contribute to such organizations can also claim tax deduction to the extent of a specified proportion of their contribution (50 per cent in most cases).

Q.2 What is the justification for such exemption?

Ans. NGOs and other voluntary and non-profit organizations supplement governmental efforts in promoting economic and social development and thus serve as partners in advancement of welfare activities. Genuine voluntary organizations have the advantage of local presence, possess local knowledge, and also bring in additional resources which help meet social and economic goals of the government. The revenue foregone by way of tax exemption is, therefore, employed effectively for achieving the nation’s developmental goals.

Q.3 Who are the authorities responsible for grant of such exemption?

Ans. For each type of exemption, the law specifies the authority competent to grant the necessary approval.

Q.4 What is a “trust”?

Ans. Under general law, a ‘trust’ is defined as an obligation attached to the ownership of property, and arising out of the confidence reposed by the author of the trust in the trustees. In the I-T Act, however, the word has been used in a wider sense to include any other legal obligation, even where the legal requirements for creation of a trust are not strictly met.

Q.5 Section 11 exempts income from property held for “charitable purposes”. What is meant by “charitable purpose”?

Ans. “Charitable purpose” under Income Tax law as it now stands includes, (a) relief of the poor (b) education, (c) medical relief, (d) preservation of the environment (including watersheds, forests and wildlife), (e) preservation of monuments or places or objects of artistic or historic interest, and (f) advancement of any other object of general public utility (as distinguished from benefit of individuals or narrowly defined interest groups).

From 01.04.2009 onwards, “advancement of any other object of general public utility” does not include carrying on of business activity of any kind, regardless of the manner in which income earned from such business activity is intended to be utilized (an exception, has been made in cases where receipts from such business activity do not exceed Rs. 10 lakhs, which stands increased to Rs.25 lakhs w.e.f. 01.04.2012).

Q.6 How is “income” defined in case of a charitable trust or institution?

Ans. “Income” in the case of a charitable trust or institution has to be understood in the broadest of terms. As in the case of any other assessee, it will include income falling under different heads of income, including profits and gains of business or profession, capital gains, income from house property and income from other sources (such as dividends, interest on securities, etc.). Additionally, in the case of a charitable trust or institution, donations received (“voluntary contributions”), which otherwise do not possess the character of “income”, are also to be included in income. All these amounts will, in the first instance, be included in the income of the charitable trust or institution, and, thereafter, exemption can be claimed subject to fulfillment of prescribed conditions

Q.7 What conditions are required to be fulfilled by a charitable or religious trust seeking exemption under Section 11?

Ans. To ensure that only organizations engaged in bona fide charitable or religious activities are allowed to claim exemption from tax, the law has prescribed a number of legal and procedural requirements. Taxpayers would be well-advised to go through the relevant provisions, particularly, Sections 11, 12, 12A, 13, 115BBC and 139(4A) of the Income Tax Act, and Rules 17, 17A, 17B and 17C of the Income Tax Rules. For the sake of brevity and easy reference, however, the DOs & DON’Ts for the claim of exemption by a charitable or religious trust under Section 11 are summarized below:-

Dos

(i) The trust must be a public charitable or public religious trust and not a private trust.

(ii) Income claimed to be exempt must be derived from property held under trust.

(iii) The trust must be wholly for charitable or religious purposes.

(iv) If the trust or institution has taxable income for the year before claiming exemption under Sections 11 and 12, its accounts must be audited by a Chartered Accountant (or other person competent to audit accounts under Income Tax Act) and audit report in the prescribed Form must be filed with the return of income.

(v) The trust must be registered by Commissioner/Director of Income Tax under Section 12AA.

(vi) Activities of the trust must be carried out in India [specified exception exists – see Chapter-5, Para – 5.5(iii)]

(vii) 85 per cent or more of the income for the year must be applied to (i.e., put to use) for charitable or religious purposes, and the balance (i.e., 15 per cent or less) must be accumulated or set apart for future application to charitable or religious purposes,

or

If 85 per cent of the income is not applied to charitable or religious purposes during the year, the same must be accumulated or set apart for future application for definite and specified purposes. For this purpose, the assessee must a, give a notice in writing (in Form No.10) to the Assessing Officer within the due date of filing of return of income b, invest the money so accumulated or set apart only in specified modes [see Annexure-IV]. The maximum period for which such income can be accumulated or set apart is 5 years.

(viii) If income of the trust or institution includes any income from business, such business must be incidental to the objectives of the trust, and separate accounts must be maintained for such business.

(ix) If the trust or institution had taxable income during the year without giving effect to Sections 11 and 12, it must file a return of income.

(x) Capital gains, if any during the year (whether short or long­term), must be reinvested in a new capital asset in order to be deemed to have been applied to charitable purposes.

Don’ts

(i) Property must not be held under trust for private religious purposes but for the benefit of public.

(ii) The trust or institution must not have been created or established for the benefit of a particular religious community or caste (other than SC/ST/Backward Classes, women and children).

(iii) Under the terms of the trust or rules of the institution, no part of its income must directly or indirectly be for the benefit of the author/founder/trust/ institution/trustee/ manager or other such interested person

(iv) No part of the income or property of the trust or institution must actually be used or applied during the previous year either directly or indirectly for the benefit of any such person.

(v) None of its funds should be invested or continue to remain invested during the previous year otherwise than in the modes specified under Section 11(5) (this is subject to specified exceptions such as assets held as corpus, accretions to the same by way of bonus shares, debentures acquired under certain circumstances etc.).

(vi) Anonymous donations, if any, will be taxable at the rate of 30 per cent [please see Chapter-5 (Para-5.4) for details].

(vii) The purposes for which income is sought to be accumulated or set apart for future accumulation must not be vague or non-specific, and cannot travel beyond the objects of the trust. The amount so accumulated cannot be applied to a different purpose, must continue to remain invested in the specified modes, and cannot be credited or paid to any other trust or institution.

Q.8 What is the procedure for registration of a trust by the Commissioner of Income Tax?

Ans. The procedure for registration by CIT is briefly as follows:

1. Application to be made by the trust or institution in Form 10A accompanied by,

(a) original/certified copy of trust deed/instrument and an extra copy, (if created without an instrument, original or certified copy of documents evidencing creation of the trust/institution and an extra copy),

(b) in case the trust is not a new one, two copies of accounts for preceding three years;

(c) self-certified copy of registration with Registrar of Companies or Registrar of Firms and Societies or Registrar of Public Trusts, as the case may be

(d) self-certified copy of the documents evidencing adoption or modification of the objects, if any

(e) where the trust or institution has been in existence during any year or years prior to the financial year in which the application for registration is made, self certified copies of the annual accounts of the trust or institution relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up

(f) note on the activities of the trust or institution

(g) self-certified copy of existing order granting registration under section 12A or section 12AA, as the case may be

(h) self-certified copy of order of rejection of application for grant of registration under section 12A or section 12AA, as the case may be, if any

2. CIT to verify the application and call for any documents/ information necessary to satisfy himself about the genuineness of the activities of the trust;

3. Form No. 10A shall be furnished electronically,—

(i)  under digital signature, if the return of income is required to be furnished under digital signature;

(ii) through electronic verification code in a case not covered under clause (i).

4. The CIT to pass order in writing granting or refusing registration (where he refuses registration, he must give an opportunity of being heard to the trust/institution);

5. Such order to be passed within six months from the end of the month in which the application was received.

Q.9 When is registration ordinarily refused by the CIT? 

Ans. The CIT will ordinarily refuse registration if,

(i) The trust is not a public charitable/religious trust;

(ii) The objects of the trust are not charitable;

(iii) Some objects exist for the benefit of the settler or trustees or their relatives;

(iv) A provision exists for transfer of any part of the income or the assets of the trust to any private individual or body;

(v) The trust is created for the benefit of any specific religious community or caste or individual and not for the public at large.

Q.10 Upon registration, from which Assessment Year does an assessee become eligible for exemption under Sections 11 and 12?

Ans. Upon registration exemption under Sections 11 and 12 are available from the Assessment Year immediately after the financial year in which the application was made.

Q.11 Who is competent to Audit the accounts of the trust for the purpose of Section 12A?

Ans.  Chartered Accountant or a person entitled to be appointed as an auditor of companies is authorized to carry out the requisite audit.

Q.12 What are “anonymous donations”? To what extent are they exempt in the hands of a charitable or religious trust or institution?

Ans. “Anonymous donation” has been defined as a voluntary contribution where the trust or institution receiving such contribution does not maintain record of identity indicating the name and address and other requisite particulars of the person making such contribution.

Q.13 What are “corpus donations”? Are they taxable in the hands of a charitable or religious trust or institution?

Ans. Income in the form of voluntary contributions made with a specific direction from the donor that they shall form part of the corpus of the trust or institution, are generally referred to as “corpus donations”. Such donations are fully exempt from tax under Section 11(1 )(d) of the Act.

Q.14 What is the rate of taxation applicable to the taxable income if any, of a charitable or religious trust or organization?

Ans. Income derived from property held under trust wholly for charitable or religious purposes, to the extent it is not exempt under Sections 11 and 12 is liable to tax at normal rates applicable to an Association of Persons (AOP) except when the same is in the nature of anonymous donations which will be dealt with as mentioned in the answer to FAQ No. 12 above. Further, in cases where exemption under Section 11 is forfeited by a trust or institution on account of a default under Section 13(1)(c) or 13(1)(d) (i.e., where the trust or institution either directly or indirectly benefits its author, founder or any other person mentioned under Section 13(3), or because the funds of the trust or institution were invested otherwise than in the specified modes), income of such trust or institution will be taxable at the rate (including surcharge) applicable to the highest slab of income for the assessment year under consideration.

Q.15 What is the extent of tax deduction available to a donor who contributes to charitable or religious trust or institution?

Ans. Under Section 80 G of the I-T Act, donors to such organizations are eligible for deduction as a percentage of the amount donated by them. In most cases the rate of exemption applicable is 50 per cent of the amount donated. For a donor to claim such exemption, the trust or institution to which the donation has been made must be one which has been approved by the Income Tax Department for this purpose.

Q.16 What is the procedure to be followed by a trust or institution for obtaining such approval under Section 80G?

Ans.  The trust or institution which fulfils the conditions mentioned in Para 7.1 can make an application in Form No. 10G along with copies of relevant documents mentioned in Para 7.3.

Q.17 What is the timeframe available to the Commissioner of income tax to decide on an application made by a trust or institution under Section 80G? For what period is the approval granted by the Commissioner valid?

Ans. The Commissioner of Income Tax to whom the application is made has to dispose of the application within six months (excluding the period taken by the assessee for providing the information called for by the Commissioner in the process of granting approval).

After recent legal amendments, an approval granted to a trust or institution under Section 80 G is now valid for all future years unless it is withdrawn by the Commissioner where he is satisfied that the activities of the trust or institution are not genuine or are not being carried on in accordance with its objects.

Q.18 What type of organizations can claim the benefit of exemption under Section 10(23C)?

Ans. Apart from the various funds set up by the government (such as the Prime Minister’s National Relief Fund) which are specifically mentioned in Section 10(23C), a university or other educational institution, a hospital or other such institution as well as various other religious or charitable funds, trusts, institutions are eligible for the benefit of Section 10(23C) provided they are approved for this purpose by the prescribed authority [the jurisdictional Chief Commissioner of Income Tax or Director General of Income Tax(E)]. The detailed procedure for seeking approval and the effect of grant of such approval by the prescribed authority have been discussed in detail in Chapter-10 (Para- 9.4 to 9.12). The prescribed authority is also empowered to withdraw the approval already granted if it is satisfied that the assessee fund or trust or institution has violated the legal requirements regarding application of income, investment of funds, genuineness of activities etc. However, the prescribed authority is required to give a reasonable opportunity to the assessee before withdrawing approval.

Q.19 What type of associations are entitled to seek notification under Section 35(1)(ii) or 35(1)(iii) and to exemption under Section 10(21)? What is the procedure for claiming such exemption?

Ans. After the recent amendments, approved “research associations” (and not necessarily “scientific” research associations as was the case earlier) are now eligible for notification under Section 35 and exemption from tax under Section 10 (21). However, all such associations must be approved by the central government for this purpose. The restrictions which apply to a trust or institution claiming exemption under Section 11 regarding manner of application and accumulation of income, investment of funds, business income etc. also apply to such research associations with necessary modifications. For further details, please see Chapter 10.

The procedure for seeking approval of the central government under Section 35 is also discussed in detail in Chapter-10 (Para-10.3 to 10.10).

The central government may reject an assessee’s application for approval under this Section where it is not satisfied regarding the eligibility of the assessee. The central government may also withdraw the approval already granted by it for the reasons discussed in Para-10.7.

Q.20 Where a trust fund or institution is approved by the central government under Section 35, can an Assessing Officer still reject the claim of such trust or fund or institution to exemption under Section 10 (21)?

Ans. In such cases, the Assessing Officer, if he is of the view that the contravention of Section 10(21) has taken place, is required to intimate the central government of the contravention. He can complete the assessment by denying the benefit of Section 10(21) only if the central government withdraws the notification.

Changes in Budget 2018:-

The Honorable central Government of India has amended that

1. Section 40(a) (ia) with regard to deduction of Tax at Source on expenses as per Chapter XII-B. That means, the Trust has to deduct, pay and file ETDS returns.

2. Section 40A (3) which prohibits payment of cash more than Ten Thousand rupees for any expenses including expenses which are capital in nature.

3. Section 40A(3A) which deals with if any expenditure was allowed for deduction, then any payment in cash more than ten thousand rupees will attract the disallowance of such expenses in the year in which payment is made