Insights on Section 12A of the Income-tax Act, 1961 (ITA)

Charitable trusts, non-profit organisations/non-government organisations (NPOs/NGOs), welfare societies, religious institutions, and Section 8 companies must register under Section 12A to claim complete tax exemptions under Sections 11 and 12 of the Income-tax Act, 1961 (ITA).

It’s important to note that income from property held for religious and charitable purposes gets exemption under Section 11. In contrast, Section 12 offers income exemption from voluntary contributions that a charitable or religious trust receives from a donor. 

If a particular entity engaged in welfare activities is not registered under Section 12A, its receipts or financial dealings will come under the tax purview. To cite an example, consider that an NGO received Rs 10 lakh donation from an individual as a voluntary contribution. If this particular NGO is not registered under Section 12A of the ITA, such an amount received as a donation will not be exempted from tax. Instead, they will be liable to pay tax as prescribed in the IT Act on the total amount received. 

Benefits Under Section 12A

One of the benefits under Section 12A is when a trust, NGO, or institution sets up their operations, they receive a tax rebate of 15% on their income, provided they plough back such money into charity or welfare activities. You cannot use this particular amount received through rebate for any personal use.

The registration under 12A is mandatory to receive grants from the Central or State governments. However, private or family trusts cannot avail of exemptions under Section 12A.

Section 12A: Amendments In Finance Act, 2022 and 2020

• Maintenance of books of accounts: The Finance Act, 2022 proposes to amend the provisions of Section 12A. As per the amendment, if the total income of the trusts, NGOs, or welfare institutions exceeds the basic exemption limit (Rs 2.5 lakh), they are required to maintain books of accounts and other documents in such form and manner, and place as may be prescribed as per the income tax rules. Earlier, there was no specific reference regarding maintenance of books of accounts.
• Audit: If the income exceeds the basic exemption limit, they must get their accounts audited. This will come into effect from assessment year (AY) 2023-24. Apart from streamlining the format of books and accounts, this move will relieve trusts from filing audit reports in Form No. 10B.
• Period of utilisation of accumulation: If 85% of trust’s income is not entirely applied towards charitable activities in a particular year, such funds not applied becomes taxable in that year(effective from FY 2022-23). Previously, it was allowed to carry forward the accumulated funds to be applied in the future years (up to next five years).
• Application of income to be reckoned only on payment basis: Effective from FY 2021-22, trusts/institutions need to ensure that expenses pertaining to or accrued in the current year be paid by March 31, 2022 in order to treat such expenses ‘application of income’ in the current year.
• New tax rate prescribed for prescribed incomes: Specified incomes (outcomes of violations such as accumulation of funds for prohibited purposes, partial application of accumulated funds and provisions of excessive benefits to trustees, among others) would be taxable at a flat rate of 30% without reduction of any expenditure/allowances or set off of losses.
• Earlier, the Finance Act, 2020, introduced certain amendments which mandate that charitable institutions are required to re-apply for a registration. This came into effect on April 1, 2021. The process aimed to ensure that the charitable activities of such trusts, social welfare organisations, or NGOs are genuine. A benefit of the re-registration process is that a provisional certificate for the registration under the IT Act is provided for a duration of three years without detailed inquiry from the tax authorities.

Documents required for registration under Section 12A of the ITA

The following set of documents are required while applying for a registration under Section 12A:

• Copy of registration with the registrar of companies (ROC)/public trusts/firms or societies
• Know your customer (KYC) details of members
• PAN card details of the trust, society, or institution
• Copy of a utility bill of the registered office, rent agreement and no-objection certificate (NOC)
• Self-certified copy of establishment of a trust or social welfare organisation
• Note which provides complete details of the activities of such organisations
• Self-certified document, which highlights order granting registration under Section 12A, Section 12AA or 12AB as the case may be
• Suitable proofs that support documents of the establishment of the trust or society
• Self-attested document copies of the annual financial account of the trust or society
• Self-certified copy in case of an application or notice of rejection order as the case may be

Process For Online Revalidation Under Section 12A Using Form No. 10A

The registration for Section 12A is a one-time process. Charitable or religious trusts, NGOs are required to file an online application to the Principal Commissioner of Income Tax (PCIT)/ Commissioner of Income Tax (CTI) through Form No. 10A. 

• Log in to the income tax portal: www.incometax.gov.in 
• Choose ‘e-File’ tab, click on ‘Income Tax Forms’ and go to ‘File Income Tax Forms’ option
• Under ‘Persons not dependent on any source of income/Source of income not relevant’ tab, select ‘Form 10A’
• Choose the ‘Assessment Year (AY)’ from the drop-down menu
• Select the ‘Prepare and Submit’ 
• Key in the details mentioned in Form No. 10A and attach relevant attachments
• Submit the form using a digital signature certificate (DSC) or electronic verification code (EVC)

Frequently Asked Questions (FAQs)

• Do applications under 12A and Section 80G of the ITA need to be filed together, or can they be filed separately?

Yes, it is possible to file applications under Section 12A and Section 80G separately.

• What is the difference between Section 12A and Section 12AA of the ITA?

While Section 12A is related to trusts or social welfare institutions registered before 1996, Section 12AA deals with those incorporated after 1996.