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Income Tax Benefits for Charitable Trusts and NGO

Writer's picture: Indrajeet SharmaIndrajeet Sharma

Taxpayers can save money on taxes by making donations or engaging in religious or philanthropic activities. The Indian Income Tax Act's Section 80G makes provisions for this. According to 80G, your taxable income can be calculated by deducting your contributions to NGOs, Central and State Relief Funds, and other charitable organisations. This article will explain how the tax laws apply to trusts that engage in charity or religious activities, as well as when and how to claim deductions for donations made to charitable trusts and non-governmental organisations.

 

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Understanding Charitable Trusts and NGOs

Charity is altruistic voluntary assistance to those in need, whether in the form of cash or in kind. As a result, there are several non-profit organisations and non-governmental organisations (NGOs) that raise money for philanthropic causes all over the world by establishing trusts or institutions. Trusts can be established for religious, charitable, or both reasons. The government's social welfare goals and economic development are greatly aided by the work of these institutions. Their more localised strategy and outreach aid in identifying those in need and providing assistance. Because of this, the government has given charity organisations a number of tax breaks and incentives. Additionally, individuals who donate to these organisations or trusts can benefit from Section 80G.


Income to be Applied for Exemption

Assume that the trust's income from assets held in trust for religious or charitable purposes is to be claimed as exempt. In that instance, a trust must use at least 85% of its earnings for religious or charitable causes in India. The following are included in the definition of charitable purpose given by tax provisions: 


  • Education

  • Yoga

  • Relief of the poor

  • Medical relief

  • Environmental preservation 

  • Advancement of any other object of general public utility


Furthermore, income used for capital asset purchases, capital asset loan repayment, revenue expenditures, and donations to other trusts up to 85% registered under Sections 12AB and 10(23C) will also be regarded as applied for charitable purposes and exempted from tax.

The Act doesn't clarify what is meant by "religious purpose." Religious reasons are inherently linked to religion and a matter of faith for people or groups. The promotion, encouragement, or dissemination of religion and its principles is referred to as religious purpose. Even though it can be for the benefit of a specific caste or religious community, the revenue of a religious trust or organisation is entitled to exemption. Private religious trusts are not eligible for the exemption; only public religious trusts are.


Income Tax on Charitable Institutions or Trusts

The following table shows the income tax applicable to charitable institutions or trusts:

Income category

Income subject to tax

Taxability

Donations/voluntary contributions

Voluntary contributions to form part of a corpus of trust or institution

Exempt


Voluntary contribution without specific direction

Constitutes a portion of the revenue from assets held in trust; under specific circumstances, these donations are exempt.

Anonymous donations (donations where donee does not keep record of identity/any particulars of the donor)

Donation exceeding higher of the following:

i) 5% of total donations received by the trust or

ii) Rs 1,00,000

Excess anonymous donation taxed @ 30%


Anonymous donations received by 

  • Religious trust or 

  • Trust established wholly for religious and charitable purposes

Taxable like voluntary contributions (without specific direction) 

Income from property under trust for charitable/religious purpose

Income applied for charitable/religious purposes within India

Exempt


Income accumulated or set aside for applying towards charitable/ religious purposes within India

Exempt up to 15% of such income. This means at least 85% of income from the property for charitable/religious purposes in India and the balance 15% can be accumulated or set aside.

Income from property held under trust for charitable purpose to promote international welfare in which India is interested

CBDT by general /special order has to direct that such income will not be included in the trust’s total income 

Exempt

Capital gain from an asset under trust in whole

Net consideration is utilised fully to acquire another capital asset

Entire capital gain is deemed to have been applied for charitable/religious purpose and hence is exempt


Net consideration is utilised partially to acquire another capital asset

Capital gain utilised in excess of cost of the old asset transferred is considered to have been applied for charitable/religious purposes and is exempt


What Happens if 85% of Income is Not Applied

If the following requirements are satisfied, a trust or institution's income from property held under it is nevertheless exempt even if it is unable to apply 85% of it. 

  • In certain situations, the income is deemed to have been used for philanthropic purposes. 

  • Under certain scenarios, the trust may amass 85% of revenue that has not been applied or is presumed to have been applied in order to claim the exemption.

We will now explain both these scenarios in detail:


Income Deemed to Have Been Applied

  • In the event that income is not received: If all or a portion of the income was not received in the preceding year, it may be assumed that it was applied for that year. The trust should use the income for these purposes either in the year prior to the previous year of receipt or in the year immediately following the previous year of receipt; or 

  • If money is not spent, it should be applied for such purposes in the year immediately following the year in which it was earned, for whatever other reason.

This option must be used in Form 9A, which the trust will provide electronically within the time frame allotted for submitting an income return under Section 139(1).


Accumulation of 85% Income of Trust

It is permitted to accrue or be set aside if at least 85% of the trust or institution's income has not been applied or is presumed to have been applied as previously stated. And if the following requirements are met, such income will be exempt. 


  • Form No. 10—notice of accumulation of income by charitable trust or institution—must be electronically provided by such a trust or institution at least two months prior to the deadline for submitting the income return.

  • Describe the reason that income is being saved or accumulated.

  • Income cannot be accumulated for more than five years, and any years that income is accumulated or set aside as a result of a court order or injunction are not included in the five-year calculation.

  • It is not appropriate to gift funds to any other trust; instead, they should be invested or deposited in a designated manner.


Income will be taxable as follows if not accumulated:

Category of violation

Year of taxation

If income is applied for purpose beyond charitable or religious

Year of application

Income ceases to be invested as required

Year in which it ceases to be invested as required

Not utilised for the purpose for which accumulated or set aside up to 5 years

Last year of accumulation period


Investment of Accumulated Income

As previously stated, in India, income up to 15% may be saved or stored for its use. Additionally, in India, 85% of income can be saved or accumulated and not used for the designated purpose. The following investment methods must be used to make such accumulations: 

  • A deposit in a post office savings bank, scheduled bank, cooperative bank, or government savings certificate/UTI

  • Investing in any financial security issued by the federal or state governments, including company debentures that are fully and unconditionally guaranteed by them

  • Investment in immovable property

  • Deposit or investment in a public sector organisation

  • Bond investments or deposits made with a financial corporation or public firm (established in India) that offers long-term financing for the industrial development of India


Exemption Not Applicable in Some Cases

The following trust or institution incomes are not exempt: 


  • Total income from assets held in trust for private religious purposes that do not benefit the general public.

  • Total income from charitable trusts or organisations set up to indirectly benefit any specific caste or religious community.

  • Total income if the institution's or charity's income (in whole or in part) and assets are utilised for the benefit of a designated person.

  • The charity or religious trust's income is not invested as directed.

  • Value of medical or educational services provided to a designated individual by a charitable or religious trust operating a hospital, medical facility, or educational institution to a specified person.

  • Any revenue derived from business profits and gains, unless the business is incidental to achieving the trust's or institution's goals and separate books of account are kept for such business.


The following individuals have been designated for this purpose: 

  • The creator or founder of an organisation or trust 

  • Anyone who has contributed significantly—that is, more than Rs 50,000—until the conclusion of the fiscal year 

  • If the founder, author, or other individual is a HUF, a member of that HUF 

  • Any family member of any of the aforementioned authors, founders, significant contributors, trustees, or managers of the trust or institution 

  • Any issue in which any of the individuals listed above have a significant stake, meaning they have contributed more than 50% of their entire income until the conclusion of the fiscal year


Documents for Registration under Section 80G and 12AB

To obtain an 80G Certificate, a trust has to give these documents:

  • PAN card

  • Certificate of Incorporation

  • MoA and Registration Certificate

  • List of donors

  • A detailed list of the Board of Trustees

  • NOC

  • Form 10G

  • Documents related to IT returns, Book of Accounts, and Bank Statements of the last three years

  • Trust Deed, in case the NGO is a Trust

  • A complete list of welfare activities

  • Copy of the latest utility bills such as House Tax Receipts or Water or Electricity Bills 


Documents required to get 12AB Certificate include:

  • PAN card

  • Form 10A

  • Documents for the creation of the Trust/NGO

  • A Certificate of Incorporation and copies of MoA & AoA In the case of Section 8 Company,

  • Financial statements for the three consecutive preceding years


Filing Income Tax as a Trust/NGO

Whether or not they are excluded from trust taxes, NGOs, trusts, and all other public non-profit organisations must use the ITR 7 form to file their income taxes. The following are the main things to keep in mind: 


  • Online filing is required.

  • A digital code or signature is required. 

  • NGOs whose audit is covered by section 44AB must provide a return under digital signature. 

  • If obtaining an exception under sections 11 and 12, the deadline is October 31. 

  • If you are not claiming an exemption, the deadline is July 31.


Conclusion

The Indian system of trust taxation offers contributors and charitable organisations a number of benefits. A trust can engage in as much work as possible while adhering to the law if the complex laws of trust taxes, NGO contribution tax exemption, and charity trust income tax provisions are well understood. Even though laws are always changing, donors and trusts alike need to stay up to date on the most recent changes to India's trust taxation.


FAQ

Q1. What is the main benefit of taxation of trust in India for charitable organizations?

In India, trusts for charitable organisations are excluded from paying taxes on income used for philanthropic purposes. Therefore, benevolent groups are exempt from trust taxes.


Q2. How does NGO donation tax exemption work for donors?

Section 80G allows donors to claim a tax exemption for donations to authorised NGOs and trusts. In India, donations to NGOs that are exempt from taxes are common.


Q3. Are all donations to NGOs eligible for tax exemption in India?

Donations to NGOs are only exempt from taxes if they are registered under Section 12A and have received an 80G certification. NGO tax exemption legislation will not apply to other donations, which are subject to taxation.


Q4. What percentage of income must a charitable trust apply toward its stated purposes?

According to the taxation of trust standards, the NGO may be subject to taxation if at least 85% of the trust's income is not used for charitable purposes in India. In this specific instance, trust taxation would be relevant.


Q5. Can foreign donations to NGOs in India qualify for tax exemption?

Under the FCRA, foreign donations are governed by separate rules and cannot be eligible for the same tax breaks as domestic donations.


Q6. What are the results if an NGO fails to file its income tax return?

Penalties, the loss of tax-exempt status, and other legal repercussions might arise from failing to file returns. An NGO would start to be taxed of trust if it lost its tax-exempt status.


Q7. Should a charitable institution/NGO obtain registration?

Yes, in order to claim a tax exemption, the nonprofit organisation or charity institution must register under the Income Tax Act.


Q8. How often do NGOs need to renew 80G certification?

According to recent modifications, 80G certifications must be renewed after their five-year validity.


Q9. Which form is applicable for applying for a registration under the Income Tax Act?

The NGO or charitable organisation should submit their registration application using Form No. 10A.


Q10. What if trust conducts business activity also?

Any business activity that generates up to 20% of the trust's total revenue is deemed to have a charitable purpose.


Q11. What if the receipts of business activity exceed 20% of the total receipts of trust?

In that scenario, trust exemptions won't be granted for the fiscal year where business activity receipts above 20%.


Q12. When can a donor claim a deduction under section 80G of the Income Tax Act?

Section 80G of the Income Tax Act allows a donor to deduct contributions made to a recognised charity or non-profit organisation.


Q13. Will the depreciation on capital assets be allowed as an application of income?

Depreciation will not be taken into account for income application if the cost of purchasing capital assets is regarded as an application of revenue.


Q14. What happens if a trust does not apply 85% of its income?

By accumulating the income under certain conditions or by deeming the income applied in the following year, trusts that do not apply 85% of their income can nevertheless claim an exemption.


Q15. What are trust income tax slabs?

The following slab-rate is applied while taxing the income: 

  • No tax is due on amounts up to Rs. 2.5 lakh.

  • 5% of (taxable income minus Rs. 2.5 lakh) between Rs. 2.5 lakh and Rs. 5 lakh 

  • Rs. 5-10 lakh to twelve thousand plus twenty percent of the taxable income less Rs. 5 lakh

  • 30% of (taxable income less Rs. 10 lakh) plus Rs. 112,500 is the amount beyond Rs. 10 lakh


Q16. Under which section is the revenue expenditure and donation of trusts exempted?

Up to 15% of the revenue from assets owned by trusts or organisations engaged in religious or philanthropic endeavours is free from taxes under Section 11(1A).



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