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Module of Tax exemptions for NGO

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					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 ed ucational
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 income 1 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
           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.

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 sch ool. 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.
       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                 Percentage of
                                             tax payable
Up to Rs. 1,50,000                                Nil
From Rs. 1,50,000 to Rs. 3,00,000                10 %
From Rs. 3,00,000 to Rs. 5,00,000                20 %
Above Rs. 5,00,000                               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         Nature of income                     Extent to which exemption allowed
11(1)(a)        Income derived from property held To the extent income applied to such
                under trust wholly for charitable or charitable or religious purposes in India.
                religious purposes
                                                     Whereas accumulated or set apart for such
                                                     application, to the extent of 15% of the
                                                  income from such property.
11(1)(c)      Income derived from property held To the extent income is applied to such
              under trust for a charitable charitable or religious purposes outside
              purpose, which tends to promote India.
              international welfare in which
              India is interested                 Exemption is available only if the Board
                                                  has directed such exemption.
11(1)(d)      Income in the form of voluntary 100% exemption
              contributions made with a specific
              direction that they shall form part
              of the corpus of the trust or
              institution.

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)(b) Income of charitable trust created for benefit for particular religious
         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)(d) Any income, is taxable if

           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 donor‟s 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 unde r 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 a n 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 childre n 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


                                Other useful                        No trade,
                                 purposes                         commerce or
                                                                  business like
                                                                    acti vi ties




According to Section 2(15), „charitable purpose‟, includes relief o f 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 whic h 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

				
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