Income Tax for NGOs

Background: Generally Non Profit Organizations (NPOs) are exempt from the income tax. This has been done mainly to encourage the charities in the country. NPOs are also being considered as more effective and efficient in promoting welfare of society. As charitable organizations get exemptions from income tax, many other organizations would also seek to get classified as charitable entities. In order to prevent this practice, there are strict norms and procedures laid down by Income Tax Act 1961. No Tax for Charities: Under the Income Tax Act 1961 (I T Act), charitable organizations (whether trust, society and section 25 of the company) in India are not liable to any income tax, provided certain conditions required under law are fulfilled. As per the section 11(1) (a) to (c) as well as 10(23C) (annexure I) of I T Act the term NPO includes religious organizations such as temples, churches, mosques etc and charitable organizations such as educational institutes, hospitals, NGOs etc. Organization may qualify for tax - exempt status if the following conditions are met: A. At least 85% of the income derived from property held under trust, should be applied to charitable or religious purposes (annexure II) in the relevant previous financial year in order to claim full tax exemption. Property of the trust also includes a business undertaking held under trust. U/s 10 (23C) (iv) or (v) The application for exemption has to be made by charitable and religious organization in the prescribed form No 56 (annexure III) B. Surplus income1 for which an application has to be made in Form No. 10 (annexure IV) may be accumulated for specific projects for a period ranging from 1 to 5 years; C. The property should be held under trust wholly for charitable or religious purposes. D. No part of the income or property of the organization may be used or applied directly or indirectly for the benefit of the founder, trustee, relative of the
1

Surplus income is the late receipts of grant or interest. In such case, the trustees are allowed to spend this amount / surplus during the succeeding 12 months. A letter to this effect should be submitted to Income Tax department, while filling the returns. Surplus income can also be accumulated for a period not exceeding 10 years (10 years to be substituted 5 years in case of income accumulated after 1-4-2001) for specific projects like construction of new building of hospital or school. To record the accumulation of such surplus income, an application has to be made in prescribed form No 10. Accumulated income, during the period of accumulation should be invested as per the modes given in section 11 (5) of Income Tax Act. If such income or any part thereof is not utilized for specified purposes during the period of accumulation or in the 11 th year, the amount which has not been utilized would be liable for tax as the income of the previous year immediately after the expiry of accumulation period.

founder or trustee or a person who has contributed in excess of Rs. 50,000 to the organization in respective financial year; E. The organization must timely file its annual income return, immediately after the expiry of each financial year. F. The income must be applied or accumulated in India. However, trust income may be applied outside India to promote international causes in which India has an interest, without being subject to income tax. G. Income from such property should be applied to charitable or religious purposes. (Exemption is available to the extent of such application) H. The assessee is to apply for registration in Form No. 10A (annexure V) in duplicate before the expiry of 1 year from the creation of trust. I. The funds of the organization must be deposited as specified in section 11(5) (annexure VI) of the income tax Act Note: Charitable institutions investing their funds in forms and modes other than those prescribed u/s 11 (5) lose exemption u/s 11 and 12 of the Income Tax Act and, as such, the relevant income is taxed at the rates as applicable to Association of Persons (AOP) as provided in section 164 (2) of the Income Tax Act As per the Circular no. 387 dated 06/07/1984 , Ref (http://law.incometaxindia.gov.in/TaxmannDit/DisplayPage/dpage1.aspx? md=1) though not very clear, supports the view that the income earned on investments infringing section 11 (5) alone should be taxed and not the total income for the accounting year. Tax structure from the financial year 2008-2009: Tax structure for Association of Persons (AOP) and Body of Individuals (BOI) is as follows. Income Limit Up to Rs. 1,50,000 From Rs. 1,50,000 to Rs. 3,00,000 From Rs. 3,00,000 to Rs. 5,00,000 Above Rs. 5,00,000 Percentage of tax payable Nil 10 % 20 % 30 %

Rate applicable to AOP is also applicable for trusts, societies, NGOs etc. For the companies formed u/s 25 rate of tax is flat @ 30% on their income.

Following is the table which explains the limits of the tax payable to Income Tax Department under section 11. Section 11(1)(a) Nature of income Extent to which exemption allowed To the extent income applied to such Income derived from property held charitable or religious purposes in India. under trust wholly for charitable or religious purposes Whereas accumulated or set apart for such application, to the extent of 15% of the income from such property. To the extent income is applied to such Income derived from property held charitable or religious purposes outside under trust for a charitable India. purpose, which tends to promote international welfare in which Exemption is available only if the Board India is interested has directed such exemption. Income in the form of contributions made with direction that they shall of the corpus of the institution. voluntary 100% exemption a specific form part trust or

11(1)(c)

11(1)(d)

In computing the 15% of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in Section 12 shall be deemed to be part of the income Exemptions not allowed u/s 11 Section Nature & extent of income not exempt under Section11

13(1)(a) Income of private religious trust not used for public benefit. 13(1) Income of charitable trust created for benefit for particular religious (b) community 13(1)(c) Income/ property of charitable or religious trust applied for direct or indirect benefit of person referred in 13(3) 13(1) Any income, is taxable if (d)

If any funds are invested other than in 11(5) Any funds invested earlier than 1983 remain invested thereafter; Shares and company are held after 1983. 11(4A) Income from business which is not incidental to the attainment of the objectives of the trust, or in respect of which separate books of accounts have not been maintained. 12(2) Value of medial/ education services provided to specified persons by trust running hospital and educational institution shall be income of trust and will be chargeable in the year in which services are provided and chargeable to tax, despite section 11(1). Exemptions not allowed u/s 13: In any financial year, if any part of income or the property held by the trust or institution is used or applied, directly or indirectly, for the benefit of any person referred to in sub section 3 of the section (13) (annexure VII) of the Income Tax Act, 1961, the trust or institution would lose its exemption u/s 11 Section 161-164 www.incometaxindia.gov.in deals with liability in special cases i.e. of representative assessee, which includes taxation of private discretionary trusts Voluntary Contributions The voluntary contributions received by a charitable or religious trust are to be treated as follows: (1) Any voluntary contribution received by a trust or institution is exempt if (a) the trust is created wholly for charitable purposes. (2) Corpus Donations Voluntary contributions made to a charitable or religious trust with a specific direction that they shall form part of the corpus of the trust i.e. corpus donations do not form part of the total income of the trust as per Section 11(1) (d). (3) Contributions other than corpus donations Section 12(1) states that any voluntary contributions (not being corpus donations) received by a charitable or religious trust shall be deemed to be the income derived from property held under trust wholly for charitable or religious purposes. Such voluntary

contributions would therefore be eligible for exemption under Section 11(1) provided the trust satisfies the conditions as prescribed under Section 11 and 13. (4) Business Income Under amendments to Section 11(4A) of the Income Tax Act 1961, Non Profit Organization is not taxed on income from a business that it operates that is incidental to the attainment of the objects of the organization provided the entity maintains separate books and accounts with respect to the business. Furthermore, certain activities resulting in profit, such as renting out auditoriums, are not treated as income from a business. (5) Anonymous Donations Anonymous donations of the following entities shall be included in the total income u/sec 115 BBC and taxed at the rate of 30%. Any trust or institution referred to in section 11 Any university or other educational institution referred to in section 10(23C) (iiiad) and (VI) i.e. its annual receipts is less than or more than Rs. 1 crore; Any hospital or other institution referred to in section 10(23C) ( iii a e) and (vi a) i.e. its annual receipts is less than or more than Rs. 1 crore; Any fund or institution referred to in section 10(23C)( iv); (established for charitable purpose) Any trust or institution referred to in section 10(23C)( v). (established for public religious purposes or public religious & charitable purposes )

(7) Anonymous donations not covered under section 115BBC The following anonymous donations shall, however, be not be covered under section 115BBC: (a) Donations received by any trust or institution created or established wholly for religious purposes. (b) Donations received by any trust or institution created or established for both religious as well as charitable purposes (other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.) Disqualification from Exemption Following groups are ineligible for tax exemption: all private religious trusts; and

charitable trusts or organizations created after April 1, 1962, and established for the benefit of any particular religious community or caste. But note that a trust or organization established for the benefit of "Scheduled Castes, backward classes, Scheduled Tribes or women and children" is an exception; such a trust or organization is not disqualified, and its income is exempt from taxation. In order to attract voluntary contributions, the trust or society needs to be registered under section 80(G) and section 35 (AC) of the income tax act which provides exemption for the donors. Following are the terms and conditions applicable for above both sections. Exemption u/s 80 (G): A donor (whether an individual, association, company, etc) is entitled to a deduction (in computing his total income) if he makes a donation to a charitable organization enjoying exemption u/s 80G of the Income Tax Act. The amount donated, however, should not exceed 10 % of the donors gross total income as reduced by the deductions (other than the deductions u/s 80G). In order to qualify for exemption u/s 80G, the charitable organization should be eligible for exemption u/s 11 and 12 or 10(22) or 10(22A) or 10(23) or 10(23AA) or 10(23C) (annexure VIII) of the Income Tax Act and should not be for the benefit of any particular religious community or caste. The application for approval of any institution or fund under clause (iv) of sub-section (5) of section 80G shall be in form no. 10G (annexure IX) and shall be made in triplicate. The application shall be accompanied by the following documents namely: 1. Copy of registration granted under section 12A or copy of notification issued under section 10(23) or 10(23C) 2. Notes on activities of institution or fund since its inception or during the last three years, whichever is less 3. Copies of accounts of the institution or fund since its inception or during the last three year, whichever is less. Donations made to charitable organizations exempt u/s 80G (5) of the Income Tax Act qualify for only 50% tax exemption. Most of the organizations enjoy exemption under section 80G (5) Exemption under section 35AC of the Income Tax Act: Contributions made to a project/scheme notified as an eligible project or scheme for the purpose of section 35AC of the Income Tax Act, would entitle the donor to a 100% deduction of the amount of such contribution. Unlike the certificate granted u/s 80G, the certificate u/s 35AC is not given to any organization as a whole, but only to an eligible

and approved projects. If general donation is made to a large multi-purpose trust, the donor would not be entitled to the 100% deduction unless he specifies that the amount has been given towards the project or scheme notified as an eligible project or scheme for the purpose of section 35AC of the Income Tax Act. Eligible projects and the schemes for exemption u/s 35AC include one or more of the following: 1. Construction and maintenance of drinking water projects in rural areas and in urban slums, including installation of pump-sets, digging of wells, tube-wells and lying of pipes for supply of drinking water 2. Construction of dwelling units for the economically weaker sections 3. Construction of school buildings, preliminary for children belonging to the economically weaker sections of the society 4. Establishment and running of non-conventional and renewable source of energy systems 5. Construction and maintenance of bridges, public highways and other roads 6. Pollution control projects 7. Promotion of sports 8. Any other programmes for uplift of the rural poor or the urban slum communities as the national committee may consider fit to support. Amendments:
Relief of Poor

Education

Charitable Purpose

Medical relief No trade, commerce or business like activities

Other useful purposes

According to Section 2(15), charitable purpose, includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility In the recent Amendment of 2009-10 in the Finance Act 2008, following Provision has been added:Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or any business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity Impact of the amendment on NGO sector: NGOs which have any business like activates or charge any fees or consideration from others, would not get tax exemption from the year 2008-09. This would even cover cases where NGO publishes a magazine and charges subscription fees and accepts advertisement in magazines. This change will not affect schools, hospitals, organizations which work for the relief of the poor. This change may affect the following kind of organizations 1. Training organizations 2. Research organizations 3. Human rights organizations 4. Micro-credit organizations 5. Environment Organizations 6. Advocacy Organizations 7. Resource organizations 8. Chamber of Commerce 9. Professional associations 10. Fund raising organizations 11. Networking organizations

If the amendment gets in to effect, there will be two options before the organizations such as: Stop the activities which can be seen as trade, business or commercial OR Demonstrate that they are only working for relief of poor or they are running schools or hospitals.

If they do not follow these rules and conditions, they need to bare the burdone of Income Tax from the year 2008-09. (Ref: www.accountaid.org ) Summary of tax compliances in (Annexure X) To get an overview of the latest amendments, click the following link. http://fmsfindia.org/fmsf/pdf/st-norms.pdf http://fmsfindia.org/fmsf/pdf/st-norms6.pdf http://www.accountaid.org/ www. incometaxindia.org