1. Definition of charitable activity:
As per the definition provided under Income tax Act, 1961, charitable purpose includes the following:
a) Relief of poor
d) Medical Relief
e) Preservation of Environment (monuments or places or objects of artistic or historic interest)
f) Advancement of any other object of general public utility.
In case the organization is engaged in working towards “general public utility” then it has to ensure that incidental commercial activities do not contribute more than 20% of the total revenue. It is essential that such commercial activity is a must for achieving the overall objective of the trust.
What if 20% criteria is exceeded?
In case the 20% criteria above is not fulfilled, the trust might lose its tax exemptions granted by Section 12AA.
2. 85% application & 15% set aside :
· To get exemption from taxability, Charitable/religious trust or institution should registered under section 12AA and 85% of the gross receipt from property held under trust for charitable/religious nature should be applied for charitable/religious purpose in India.
· Income accumulated or set aside for the application towards charitable or religious purpose in India is EXEMPT to the extent of 15% of such income.
What if 85% application is not made?
If a trust or institution is unable to apply 85% of its income from property held under them, the income is still exempt if the following conditions are met.
· The income is deemed to have been applied for charitable purposes in specified scenarios (read point A below).
· 85% of income is neither applied nor deemed to have been applied, the trust is allowed to accumulate such unapplied portion of income under specified conditions to claim the exemption.
A. Specified Scenarios:
i. Such trust or institution furnishes Form No. 10 – notice of accumulation of income by charitable trust or institution electronically on or before the due date for filing the return of income
ii. Mention the purpose for which income is being accumulated or set aside
iii. Income shall not be accumulated for more than 5 years and years in which income accumulated or set aside due to order or injunction of any court to be excluded in computing 5 years
iv. Money so accumulated or set aside is invested or deposited in specified mode.
However, if income is not accumulated as above, it is taxable as follows:
Category of violation
Year of taxation
If income is applied for purpose other than charitable or religious purposes
Year of such application
Income ceases to be invested as specified
Year in which it ceases to be invested as specified
Not utilized for the purpose for which it was accumulated or set aside up-to 5 years
Donated to trust registered under Section 12AA or 10(23C)
Year in which income is so donated
3. Audit of Accounts:
If the total income of the trust exceeding basic tax exemption limit (currently of Rs. 2,50,000) then books of accounts are required to be audited by Chartered Accountant, and Audit Report (Form 10B) is required to be filed before filing of ITR or due date for such report, whichever is earlier.
4. 5 years set aside and utilization clause. What if funds are not used in 5 years?
· In case the trust do not utilize 85% of its donations, it can set aside the funds to be used in subsequent year – up to 5 years. Such set aside is to be done by way of deposit in certain modes as specified by the income tax Act - Refer point 5 for modes prescribed.
· Funds not utilized for the purpose for which they were set aside up to 5 years are taxable in the 6th year.
5. Modes of investment for setting aside funds for 5 years:
· Investments in Government saving certificate/UTI
· Deposit in post office savings bank/scheduled bank/co-operative bank
· Investment in immovable property
· Investment in any security for money created and issued by the Central or State Government
· Company debentures fully and unconditionally guaranteed by Central or State Government
· Investment or deposit in public sector company
· Deposit with or investment in bonds of a financial corporation or public company (registered in India) engaged in providing long term finance for India’s industrial development
6. Next year utilization of funds :
· Income should be applied for charitable purpose in the year of receipt
. If such income would be applied for charitable purpose in the immediately succeeding year, Trust/organization have to submit a declaration to the Assessing Officer on or before the due date of filing of return under section 139(1) that such income shall be applied for such purpose in the immediate succeeding year.
7. Record of donors and filing of annual return:
Statement of donation (in Form 10BD) needs to be filed by organizations receiving donation electronically by using the digital signature of a person authorized to sign the return of income or needs to be filed through e-verification code (EVC). This statement has to be filed only once in a financial year.
Details to be collected from donors:
a) Name of the Donor
b) Address of the Donor
c) Donation Type (Corpus, Specific, Other)
d) Mode of Receipt (Cash, kind, Online transfers)
e) Amount of Donation
f) Unique Identification Number (PAN is mandatory)
g) Section Code (80G, 35(1)(ii), 35(1)(iia), 35(1)(iii)
After filing such return, a certificate is generated from income tax which can be shared with the donor.
8. Anonymous donation:
· Anonymous donation is the voluntary contribution received by the trust established wholly for religious and charitable purpose, whose records such as name, address not maintained by the trust.
The amount of income tax calculated at the rate of 30% on the aggregate of anonymous donation received in excess of the higher of the following-
a) 5% of total donations received by the assessee; or
b) Rs. 1,00,000
9. Disclosures in ITR :
a. Donors in excess of 50,000
A person donating more than 50,000 to a trust is known as “substantial donor” for ITR purpose. The trust has to provide details of substantial donors like - Name of such person, PAN, Aadhar Number and Address.
b. Payments to related parties, definition, nature etc
If payment was made to any such person referred to in sec 13(3) during the previous year by way of salary, allowance or otherwise, then name and amount paid to such person should be furnished by trust/organisation in Form 10B (Audit Report)
Person referred in Sec 13(3) are:
a) the author of the trust or the founder of the institution
b) any person who has made a substantial contribution to the trust or institution
c) where such author, founder or person is a Hindu undivided family, a member of the family
d) any trustee of the trust or manager (by whatever name called) of the institution
e) any relative of any such author, founder, person, member, trustee or manager] as aforesaid
10. Special points for FC registered organizations:
Every organization who has been granted registration or prior permission under section 12 of FCRA, 2010 shall maintain a separate set of accounts and records, exclusively, for the foreign contribution received and utilized.
It is also mandatory to file Annual Return(FC-4) prescribed by FCRA, 2010. Therefore, books of Accounts should be maintained in such a way that the following statements can be prepared for the requirement of the form FC-4.
· Receipt and Payment Account
· Income and Expenditure Account
· Balance Sheet
. Certificate of Chartered Accountant
11. Fixed asset/Depreciation clause:
Trust can claim depreciation as an application of income if cost of the underlying asset is not claimed as at the time of purchase.
12. Renewal of 12A and 80G registrations:
· The charitable institutions are eligible for certain tax exemptions and benefits in India. The exemptions and benefits are dealt with under Sections 12A/12AA and 80G of the Income Tax Act, 1961. The institutions availing benefits under Section 12A and 80G have to renew their registrations under these two sections.
· These registrations are valid for 5 years, after which it needs to be renewed. Application for renewal after five years has to be made at least six months before the expiry of the validity period of the registration.
For example, if registration of 12A/80G of the trust is expiring on 30/09/2022, application for renewal must be made before 31/03/2022.
Compiled by- Amruta Sohani