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Charitable Trusts and NGO - Income Tax Benefits

By Shefali Mundra

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Updated on: Jul 5th, 2024

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7 min read

Do you know that charitable/religious deeds through donation or by conducting those activities can help you save tax? Section 80G of the Indian Income Tax Act provides provisions for the same. As per 80G, you can deduct your donations to Central and State Relief Funds, NGOs and other charitable institutions to arrive at your taxable income. 

In this article, we will tell you how and when to claim deductions on donations made to Charitable Trusts and NGOs and how the tax laws are applied on the trusts conducting charitable/religious activities.

Charitable Trusts – A Brief Introduction

“The word ‘Charity’ connotes altruism in thought and action. It involves an idea of benefiting others rather than oneself” Supreme Court in the case Andhra Chamber of Commerce [1965] 55 ITR 722 (SC).  

Charity is a selfless voluntary help either in money or kind to the needy. Hence, there are various Non-Governmental Organizations (NGOs) and non-profit entities constantly working on charitable activities by raising funds all over the world by forming either an institution or trust.  

Trusts can be created for charitable purposes or religious purposes or both.

Efforts of such institutions play a significant role in promoting economic development and the social welfare objectives of the Government. Their outreach and more localised approach help to identify the needy and lend a supporting hand. For this reasons, the government has provided various tax incentives and exemptions to charitable institutions, as well as benefit of Section 80G to persons providing donations to these institutions/trusts.

Income Tax on Charitable Institutions or Trusts

We have discussed below income tax on various categories of income of charitable trust:

Category of income

Income subject to tax

Taxability

Donations/voluntary contributions

Voluntary contributions with a specific direction to form part of corpus of trust or institution

Exempt*

Voluntary contribution without such specific direction

Forms part of income from property held under trust, exemption is available on such donations subject to certain conditions

Anonymous donations i.e., donations where donee does not maintain record of identity/any particulars of the donor

Donation exceeding higher of:

i) 5% of total donations received by trust or

ii) Rs 1,00,000

Excess anonymous donation taxed at  30%

Anonymous donation received by 

  1. Religious trust or 
  2. Trust established wholly for religious and charitable purpose

Taxable in the same manner  as voluntary contributions (without specific direction) as above

Income from property held under trust for charitable or religious purpose

Income applied for charitable or religious purpose in India

Exempt*

Income accumulated or set aside for the application towards charitable or religious purpose in India

Exempt* to the extent of 15% of such income. This means at least 85% of income from property to be applied for charitable and religious purpose in India as above and balance 15% can be accumulated or set aside. [i.e., It can be claimed as exempt even if the said income is not spent]

Income from property held under trust created for charitable purpose which tends to promote international welfare in which India is interested

CBDT either by general or special order has to direct that such income shall not be included in the total income of trust

Exempt*

Capital gain from asset held under trust in whole

Net consideration is utilised fully for acquiring another capital asset

Entire capital gain is deemed to have been applied for charitable and religious purpose and hence is exempt*

Net consideration is utilised partially for acquiring another capital asset

Capital gain utilised in excess of cost of old asset transferred is considered to have been applied for charitable and religious purpose and is exempt*

*Only Charitable/ religious trust or institution registered under Section 12AA enjoys the exemption

How Should Income be Applied to be Exempt?

Suppose the income of trust from property held under trust for charitable or religious purpose is to be claimed as exempt. In that case, a trust is required to apply at least 85% of its income to charitable or religious purposes in India. As per the definition provided under tax provisions, charitable purpose includes the following:

  • Relief of the poor
  • Education
  • Yoga
  • Medical relief
  • Preservation of environment 
  • Advancement of any other object of general public utility. 

In addition, income utilised for the purchase of capital assets, repayment of a loan for the purchase of capital assets, revenue expenditure and donation to other trust to the extent of 85% registered under Section 12AB / Section 10(23C) shall also be treated as applied for charitable purposes and hence exempted from tax.

The expression ‘religious purpose’ has not been defined under the Act. Religious purposes are necessarily associated with religion and a matter of faith with individuals or communities. Religious purpose includes the advancement, support or propagation of religion and its tenets. The income of a religious trust or institution is entitled to exemption, though it may be for the benefit of a particular religious community or caste.

The exemption is available to public religious trusts only and not to trusts for private religious purposes.

Documents Required for Registration under Section 80G and 12AB

Documents for 80G Registration: To obtain an 80G Certificate, a trust needs to provide the following documents

  • PAN card
  • List of donors
  • MoA and Registration Certificate
  • Certificate of Incorporation
  • NOC
  • Documents related to IT returns, Bank Statements and Book of Accounts of the last 3 years
  • Form 10G
  • A complete list of welfare activities
  • Trust Deed, in case the NGO is a Trust
  • Copy of the latest utility bills such as Water or Electricity Bills or House Tax Receipt
  • A detailed list of the Board of Trustees

Documents required to obtain 12AB Certificate:

  • Form 10A
  • PAN card
  • Documents for the creation of the Trust or NGO
  • Financial statements for the three consecutive preceding years
  • In the case of Section 8 Company, a Certificate of Incorporation and copies of MoA & AoA

What if 85% of Income is Not Applied?

If a trust or institution is unable to apply 85% of its income from property held under it, 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
  • 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.

Let us understand the two scenarios a little more in detail 

Income deemed to have been applied  

  • Where Income is not received: If the whole or any part of the income has not been received during the previous year, then income can be deemed to have been applied for that year and trust should apply such income for such purposes during the previous year in which it is received or during the previous year immediately following the previous year of receipt; or
  • Where Income received is not spent: For any other reason, apply such income for such purposes during the previous year immediately following the previous year in which the income was derived.

Such option is to be exercised in Form 9A to be furnished electronically by the trust within the time allowed for filing return of income u/s 139(1).

Accumulation of 85% of Income of Trust:

If a minimum of 85% of the income of trust or institution has not applied or deemed to have been applied as above, it is allowed to accumulate or set aside. And such income shall be exempt, if following conditions are satisfied.

  • Such trust or institution shall furnish Form No. 10 – notice of accumulation of income by charitable trust or institution electronically before two months of the due date for filing the return of income
  • Mention the purpose for which income is being accumulated or set aside
  • 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 five years
  • Money so accumulated or set aside is invested or deposited in a specified mode and should not be donated to any other trust.

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

Year of such application

Income ceases to be invested as specified

Year in which it ceases to be invested as specified

Not utilised for the purpose for which it was accumulated or set aside up to 5 years

Last year of accumulation period

Where Should Accumulated Income be Invested?

As mentioned already, income not exceeding 15% can be accumulated or set aside for its application in India. Further, one can even accumulate or set aside 85% of the income, not applied for the specified purpose for its application in India. Such accumulations must be through the following modes of investment:

  • Investment 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

Exemption, Not to Apply in Certain Cases

No exemption is available to the following incomes of trust/institution:

  • Entire income from property held under trust for private religious purpose which does not benefit the public
  • Entire income of charitable Trust or institution established for the indirect benefit of any particular religious community or caste
  • Entire income, If income (wholly or partly) and property of the charitable or religious trust or institution is used for the benefit of specified person**
  • Income of charitable / religious trust is not invested as specified
  • Value of medical or educational services made available by any charitable or religious trust running a hospital medical institution or educational institution to specified person**
  • Any income being profits and gains of business unless business is incidental to the attainment of the objectives of the trust / institution and separate books of account are maintained in respect of such business

**Specified person for this purpose are as below:

  • Author or founder of trust or institution
  • Any person who has made substantial contribution i.e., contribution of > Rs 50,000 upto the end of financial year
  • In case author, founder or person is HUF, a members of such HUF
  • Trustee/ manager of the trust / institution;
  • Any relative of any of such author, founder, person who has made substantial contribution, trustee or manager as specified above
  • Any concern in which any of the above specified persons has substantial interest i.e., total contribution of > 50% upto the end of financial year
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Frequently Asked Questions

Should a charitable institution or NGO obtain registration under the Income Tax Act?

Yes, the charitable institution or NGO should obtain a registration under the Income Tax Act for claiming tax exemption.

Which form is applicable for applying for a registration under the Income Tax Act?

The application for registration should be in Form No. 10A by the NGO or charitable institution.

Should the trust deed be in writing?

The trust deed should be in writing and should carry the signatures of the trustees and author of the trust.

When can a donor claim a deduction under section 80G of the Income Tax Act?

A donor can claim a deduction under section 80G of the Income Tax Act for donations to a registered charitable institution or NGO.

What if trust conducts Business Activity also?

Business Activity where receipt from Business is up to 20% of the total receipts of trust is considered as Charitable Purpose.

What if the receipts of Business Activity exceeds 20% of the total receipts of trust?

In that case exemptions to trust will not be available for the financial year in which receipts of Business Activity exceeds 20%.

Will the depreciation on capital assets be allowed as application of income?

If the expenditure incurred on acquisition of capital assets is considered as application of income, then depreciation shall not be considered for application of income.

What happens if a trust does not apply 85% of its income?

Trusts who does not apply 85% of its income, it can still claim exemption by deeming the income applied in the subsequent year or by accumulating the income under specific condition.

About the Author

As a creative finance content writer and a Chartered Accountant by profession, I am deeply passionate about educating the masses about finance and taxation. To date, I have authored numerous blog posts covering a diverse range of topics on finance, taxation, trading, and investment for esteemed financial platforms. Driven by the commitment to enhance financial literacy, my ultimate goal is to demystify complex financial concepts into relatable insights and support educational initiatives in India.. Read more

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