Section 12A of the Income Tax Act: Unveiling Benefits and Key Provisions
Updated: Oct 25
NGOs and Charitable Trusts may not work for profit, but they are given special benefits by the government for doing their bit for society. It is not just about helping such organisations through grants and funds. The government also provides them with a tax-saving advantage. Tax exemption under section 12A is one of these benefits. It enables them to get relief to not pay taxes if working for the welfare of society and not making a profit from their earnings. Once an organisation is formed, it has to register under Section 12A to claim the exemption. In this guide, we will provide an overview of Section 12A of the Income Tax Act and how charitable entities can obtain exemptions under it.
Table of content
What is Section 12A?
After a charitable organisation or NGO is established, it has to register under Section 12A of the Income Tax Act to claim an exemption under Sections 11 and 12. Section 12A enables entities like Non-Profit Organisations, Charitable Trusts, Welfare Societies, and Religious Institutions to claim full tax exemption. These non-profit entities do not work for profit but strive for the welfare of the people and society. They are provided with tax exemption because their work is considered a selfless act. If any non-profitable trust or NGO is not registered for 12A, they cannot claim exemption as their financial receipts or transactions are considered taxable. Private or family trusts cannot obtain 12A registration and are not allowed such exemptions.
How Can an Organisation Become Eligible Under Section 12A?
The Department of Income Tax sets the eligibility criteria for the registration of Section 12A. According to the criteria, Section 8 companies, incorporated trusts, and societies providing public welfare and not earning a profit are eligible for Section 12A registration. These trusts can be charitable, religious, or welfare to be eligible. Further, private-owned or family-owned trusts are not eligible. The ones that are eligible must fill out the 10A form online and provide a digital signature.
Steps to Obtain 12A Registration of Trust under the Income Tax Act
Here are the steps to register your organization under Section 12A:
Step 1: Apply online in the required format
Step 2: The commission may direct you to submit additional documents if required
Step 3: Once the commission is satisfied with the information availed, he will pass an order in writing, registering your organisation or trust
In case the commissioner is not satisfied, he may convey the refusal to register your entity in writing. Typically, the registration process takes 1-3 months to conclude. Section 12AA(2) states that approval or rejection order should be conveyed before 6 months from the month-end in which the application was received.
Documents Required for 12A Registration
The documents required by the trusts, societies, and organisations while registering for Section 12A are as follows:
Copy of registration with registrar of companies or firms and societies or public trusts
Self-certified copy of establishment of organisation trust
Supporting documents of the establishment of the society or trust
Note with complete details of the activities
Self-certified document with existing order granting registration under Section 12A or12AA
Self-attested document copies of yearly account
Self-certified copy of the application rejection order for the grant of registration
How to file Form 10A Online
NGOs and societies can file form 10A online through the e-filing portal. The income tax department has a separate portal for income tax forms to facilitate the process for applicants. Besides having the required documents at hand, applicants must follow the following steps to file 10A online:
Step 1: Log onto the e-filing platform of the IT Department
Step 2: Navigate to the left side of the page
Step 3: Click on ‘Submit Returns/Forms
Step 4: Use credentials (user ID and password) to log in to your account
Step 5: Click on ‘e-file’ and select the ‘Income Tax Forms’ from the drop-down menu
Step 6: Select Form 10A from the field ‘Form Name
Step 7: Choose the relevant ‘Assessment Year’ and ‘Submission Year
Step 8: Fill in the required details and verify it
Step 9: Click on the ‘Submit’ option
Once you fill out the form, the IT commissioner inspects it and asks for the necessary documents if necessary. After registration, it becomes valid for your organisation’s lifetime. Renewal is not needed unless there are some modifications in the provision.
Difference Between 12A and 12AA
While Section 12A provides clauses for the applicability of both Section 11 and 12, Section 12AA shows how to get registered under Section 12AA. Both offer the following advantages:
Provides exemption from taxes
Ensures an upper hand in FCRA registration
Gives an advantage for availing grants from the government, overseas, or other agencies
Expenses incurred for charitable and religious activities are not included in the total income
Entities registered under Section 15A can get advantage for income aggregating to or below 15% for charitable or religious activities
What Are the Benefits Under Section 12A?
Donors donating an amount to a trust or NGO where the donation is registered with Section 80G receive tax exemption. Similarly, trusts or NGOs registered under Section 12A receive multiple benefits under Section 80G. By registering for Section 80G, they tend to boost their credibility and respect due to which donors can confidently donate large amounts to them. Besides saving taxes, donors feel a sense of satisfaction by donating to such organisations. Also, government grants and funds are easily available to trusts and NGOs registered with Section 12A and Section 80G.
Recent Amendments under Section 12A
Here are a few recent amendments made in Section 12A:
Corpus donations are not regarded as an application of income for the organisations and trusts registered under Section 12A
The amount paid to any trust or organisation under Section 12AA is not considered as an application of income for religious or charitable purposes.
When an organisation or trust registered with Section 12A undertakes modifications not conforming to the registration guidelines, they must obtain a new registration by applying within thirty days from the date of modifications.
If a person gets property from the organisation or trusts without any consideration, the property amount is taxable under the ‘income from other sources’ head.
For a property received from any foundation or hospital or university or institution or Section 12A registered trusts, the clause in Section 56 will not apply to any property or funds. Also, the government has set a limit of Rs 2,000 for deductions done through donations to foster a cashless economy and practices. It means that no deduction will be applicable under Section 80G where it exceeds Rs. 2,000 and is paid by a mode rather than cash. The limit was Rs. 10,000 before the amendment.
Eligible trusts, societies, and NGOs registered for the Section 12A exemption will get the key benefits from the IT department. Such expenditure on charity, welfare, and religious purposes will be reviewed.
Terms and Guidelines for NGOs and Charitable Organisations
Even the trusts and NGOs registered under 12A have to adhere to the following terms and guidelines to get the benefits of exemption. These include:
A charitable organisation registered as an NGO but working for a specific caste or community will be disqualified from the exemption.
A trust or NGO having other business through which they have other income will also not be eligible for the exemption.
The eligible NGOs and trusts should only accept cash donations of up to Rs 2,000 from the donors.
Amounts beyond Rs 2000 should be transferred through cheque or electronic transfer.
These trusts and NGOs should maintain receipts and account books to qualify for the exemption.
The NGO should also be registered under Section 8 Company Registration Act of 2013 or the Societies Registration Act of 1860.
These trusts and organisations can benefit from the grants received from the government and other agencies. They use these grants for basic facilities, health and hygiene, infrastructure development, and the overall welfare of society. The following conditions apply to get an exemption from paying income tax:
Registered with Section 12A and Section 80G to gain exemption from tax on the generated income
Spending more than 85% of their income on religious or welfare purposes
The primary expenditire should be on medical, health and sanitation, education, and general relief of the needy. Other practices include the conservation of history, arts, and environment, improving standards of public utilities, and creating general awareness. Sections 12A and 80G are the best sections of the IT Act when it comes to providing benefits to society. However, the only thing that trusts and NGOs should do is to follow the guidelines in these Sections.
Conclusion
Section 12A enables non-profit organisations to be exempted from tax payments. Only organisations and trusts that don’t earn a profit through working can claim this exemption. They must register online by following proper steps and providing essential documents to establish their eligibility. The good thing is that the registration is applicable for a lifetime once the form is filed and documents are verified. The registered organisations under this section should continue to work for the welfare of society and the country as per the Government of India.
FAQ
Q1. How do I register a trust or NGO under section 12A?
A trust or NGO can be registered under the IT Act under Section 12A by applying it online on the income tax site, filling out form 10A, and submitting the required documents.
Q2. How is income defined for a charitable trust or institution?
The income of a charitable trust or institution is calculated as in the case of any other assessee. It includes income under different heads such as profits and gains of business or profession, income from house property, capital gains, and income from other sources (dividends, interest on securities, etc.). For charitable trusts or institutions, voluntary contributions or donations are included in income. These amounts are first included in the income of the charitable institution or trust. Later, they can claim exemption subject to fulfilment of prescribed conditions.
Q3. What is the difference between 12A and 12AA?
Section 12A lays down conditions for the applicability of section 11 and section 12. On the other hand, Section 12AA gives the procedure for registration under Section 12A.
Q4. What is the difference between 12A and 80G?
An NGO can avail of income tax exemption under Section 12A by getting itself registered and complying with other formalities. Conversely, Section 80G enables donors to get the benefit of exemption of the amount given as a donation.
Q5. What is Form 12B?
Form 12B is filed by the individual employee joining another organisation in the middle of the year.
Q6. Can both the applications under section 12A and 80G be applied together?
Yes, it is possible to apply both the applications for sections 12A and 8OG together, though they can be applied separately as well. Organisations applying separately must apply for registration under section 12A first. Getting registered under 12A is crucial for registration under 80G.
Q7. When is registration refused by the CIT (Commission of Income Tax)?
The CIT may refuse registration in the following instances:
The organisation is not a public charitable/religious trust
Its objectives are not charitable
Some objectives benefit the settler or trustees or their relatives
The trust benefits a specific religious community or caste or individual rather than the public at large
There is a provision for the transfer of any part of the assets or income to a private individual or body
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