Introduction

The Income Tax Act, 1961 has certain provisions which offer non-profit entities such as Charitable Trusts, Non-Profit Organisation, Welfare Societies, Religious Institutions to claim tax exemption. These organisations could be in the form of a Trust, Society, or Section 8 Company, but it is essential for them to be registered under Section 12A of the Income Tax Act, 1961 to claim the exemption. The non-profit entities do not work for profit, rather for the welfare of the people and the society, and are hence, non-profits. As their work is considered a selfless act and they essentially do the work that the government ought to do, they are provided with tax-exemptions. These tax exemptions not only benefit the organisations in terms of their work and expenditure, it also helps the ‘donors’ who are associated with such organisations.


What is Section 12A?

Section 12A enables a few types of organizations to get exempted from the income tax to be paid. The trusts and non-government organizations which don’t make profits from their financial transactions are eligible to register for 12A. If any non-profitable trust or NGO has not registered for 12A, their financial receipts or transactions would be considered as taxable. The 12A Section rules and guidelines come under the Income Tax Act of 1961, the government of India. When the trust or NGO gets registered to the 12A they are further eligible to get full exemption from income tax. Once the Trust Organization or NGO is established, they have to register for Section 12A.


How can one become eligible under Section 12A?

The eligibility criteria for the registration of Section 12A are set by the department of income tax. As per the criteria the incorporated trusts, Section 8 companies and societies which provide public welfare and do not earn a profit through them are considered eligible for Section 12A registration. The trusts or societies can be religious, welfare, and charitable to be eligible for the same. The trusts or societies which are private or only owned by family are not eligible to the Section 12A registration. Once the trust or organization is eligible they must fill the 10A form through online application. The digital signature is required for the applicant trust or organization to file 10A. The 10A form can also be filed electronically through the electronic verification code.

While registering for Section 12A, along with the 12A application form other key documents are required for the trusts, societies and organizations. The documentation required is:

  • Copy of registration with registrar of companies or public trusts or firms and societies
  • Self-certified copy of establishment of trust or organization
  • Evidence supporting documents of the establishment of the trust or society
  • Self-attested document copies of yearly account of the trust or society
  • The trust or society should provide the note which has complete details of the activities
  • The trust, society or organization should provide a self-certified document having existing order granting registration under the Section 12Aor Section 12AA
  • They should also provide self-certified copy of the application rejection order for the grant of registration.

Filing of the Form 10A

Along with the above documents the trusts, societies and NGOs can file form 10A through the online portal. The income tax department has created a separate online portal for income tax forms. The applicant should open the online e-filing portal and further should click on the submit/return forms tab. The applicant should log on to the portal by creating their username and password. In the form Sections select the form 10A and select the assessment year and submission mode. Then ‘prepare and submit online’ tab allows the applicant to fill out the application for further process. Once the application form is filled online, the income tax commissioner will make an inspection and ask for the required documents if necessary. When the trust receives registration, it is valid for its lifetime. The renewal of registration is not required for the trusts and NGOs unless there are some modifications in the provision.


Amendments under 12A

However, there are some recent amendments made in Section 12A.

  • The amount which is paid to any other trust or organization which is registered under Section 12AA will not be considered as application of income for any religious or charitable purpose.
  • Corpus donations are not considered as application of income for the trusts and organizations registered under Section 12A.
  • The second amendment states that when a trust or organization registered with Section 12A has undertaken certain modifications which will further not conform to the registration guidelines should have to obtain new registration by applying within thirty days period from the date of undertaking modifications.
  • The next amendment states that if any person receives a property from the trust or organization without any consideration then the property amount will be considered as taxable under ‘income from other sources’ head.
  • If the property is received from any foundation or university or institution or hospital or Section 12A registered trusts then this clause in Section 56 will not be applied to any property or funds. In order to develop a cashless economy and practices, the government has set a limit of Rs 2,000 for the tax deduction done through the donation. It means that no deduction will be allowed under Section 80G where the donation exceeding Rs. 2,000 is paid by any other mode rather than cash. Before the amendment the limit was Rs. 10,000.

The trusts, societies and NGOs which are eligible and have registered for the Section 12A income tax exemption will receive the key benefits from the income tax department.Then such income expenditure on charity, religious purposes and welfare of the society will be reviewed. The organization with Section 12A registration will get different types of grants from the government which will help them to contribute for welfare.


Benefits under Section 12A

The donor can receive tax exemption on the donated amount if the trust or NGO where the donation is done is being registered with Section 80G. When the donor donates from their income towards the trust or NGO, they can get tax exemption on that amount. Section 12A registered trusts or NGOs can also receive multiple benefits under registration of Section 80G. By registering for Section 80G, trust and NGO tend to increase their value and respect due to which donors are more confidently able to donate large amounts towards them. Donors feel a sense of humanity and satisfaction by donating to such renowned trusts or NGOs. The government funds and grants are easily available to such trusts and NGOs which are registered with Section 12A and Section 80G. The donor can donate only the 50% of their total income in order to receive the tax exemption.


Terms and Guidelines for NGOs and Charitable Organisations

Even if the trusts and NGOs are registered, there are some terms and guidelines related to Section 12A and Section 80G. These are:

  • If charitable organizations registered as NGO are working for a specific caste or community, then the NGO will be disqualified from the exemption of tax.
  • If the NGO or trust has their other business through which they have other income then they are not eligible for the exemption.
  • The trusts and NGOs should only accept cash donations till an amount of Rs 2,000 from the donors.
  • Amounts exceeding Rs 2000 should be done through electronic transfer or through cheque.
  • These trusts and NGOs should regularly maintain account books and receipts otherwise will be non-eligible for the exemption.
  • The NGO should also be registered under the Societies Registration Act of 1860 or Section 8 Company Registration Act of 2013.

The grants received from the government and other agencies are beneficial for such trusts and organizations. Such grants can be used for the infrastructure development, basic facilities, health and hygiene, and overall welfare of the society. These are registered under Section 12A which exempts them from paying income tax.

  • The charitable trust or NGO should spend more than 85% of their income on welfare or religious purposes in order to get tax exemptions.
  • They should be registered with Section 12A and Section 80G in order to gain exemption from tax on the generated income.
  • The main expenditure should be on the education, medical, health and sanitation, and general relief of the needy. Other practices include conservation of environment, history and arts, improving standards of public utilities and general awareness.

Sections 12A and 80G are the most appreciable Sections in the Income Tax Act which directly and indirectly provide a lot of benefits to society. The only requirement that trusts and NGOs should fulfil is that they should follow the guidelines provided in these Sections. Various trusts and NGOs which are registered under these Sections provide maximum overall benefits to the economic development of the country through their constant social welfare. It is necessary for trusts, NGOs, and societies involved in religious or social welfare work to get themselves registered under Section 12A of the Income Tax Act by the Department of Income Tax, Government of India.


Conclusion

Section 12A helps a few non-profit organisations to get exempted from paying taxes. Trusts and organisations who does not earn a profit through working are eligible under this act. There are various documents which are required for one to file the form under this section. However, once the form is filed and the necessary documents are verified, the registration is applicable for lifetime. Charitable trusts and organisations along with people who donate their incomes upto 50% can benefit under this section of the Income Tax Act. All the registered organisations under this section need to continue to work for the welfare of this country as per the Government of India.

Frequently Asked Questions

Q- Can both the applications under section 12A and 80G of the Income Tax Act be applied together?

Yes! Both applications can be applied together or it can also be applied separately. If some organization is willing to apply separately then application for registration under section 12A will be applied first. It is very important to get registration under 12A for the registration under 80G of Income Tax Act.


Q- Who has to obtain PAN?

PAN is to be obtained by the following persons:

Every person if his total income or the total income of any other person in respect of which he is assessable during the previous year exceeds the maximum amount which is not chargeable to tax.

A charitable trust who is required to furnish return under Section 139(4A)

Every person who is carrying on any business or profession whose total sales, turnover, or gross receipts are or is likely to exceed five lakh rupees in any previous year

Every person who intends to enter into specified financial transactions in which quoting of PAN is mandatory

Every non-individual resident persons and person associated with them if the financial transaction entered into by such non-individual resident persons during a financial year exceeds Rs. 2,50,000.

Note: Persons associated with non-individual resident persons means the managing director, director, partner, trustee, author, founder, karta, chief executive officer, principal officer or office bearer of the non-individual resident persons or any person competent to act on behalf of such persons. A person not covered in any of the above can voluntarily apply for PAN.


Q- What are the different modes of filing the return of Income?

The Return Form can be filed with the Income-tax Department in any of the following ways, -

  • (i) by furnishing the return in a paper form.
  • (ii) by furnishing the return electronically under digital signature.
  • (iii) by transmitting the data in the return electronically under electronic verification code.
  • (iv) by transmitting the data in the return electronically and thereafter submitting the verification of the return in Return Form ITR-V

Note : Where the return of income is filed in the manner given at (iv) without digital signature, then the taxpayer should take two printed copies of Form ITR-V. One copy of ITR-V, duly signed by the taxpayer, is to be sent (within the period specified in this regard, i.e., 120 days) by ordinary post or speed post to "Income-tax Department - CPC, Post Bag No. 1, Electronic City Post Office, Bangalore-560100 (Karnataka). The other copy may be retained by the taxpayer for his record.

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

"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- When is registration ordinarily refused by the CIT (Commission of Income Tax)?

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.
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.