“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 voluntary help either in money or kind to the needy. Collective efforts are always more fruitful. 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.
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 helps to identify the needy and lend a supporting hand. For this reason, Indian government has provided various tax incentives and exemptions to charitable institutions, Section 80G being a significant one.
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 | |
| 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 | Taxed at 30% |
| Anonymous donation received by trust established wholly for religious and charitable purpose on | 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. [See below comment on 85%] | |
| 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 directed 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
In order to be exempt, trust is required to apply at-least 85% of its income to charitable or religious purpose in India. As per the definition provided under tax provisions, charitable purpose includes the following:
In addition, income utilised for purchase of capital asset, repayment of loan for purchase of capital asset, revenue expenditure and donation to trust registered under Section 12AA and 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 a 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 under Section 11 is available to public religious trusts only and not to trust for private religious purposes.
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.
Let us understand the 2 scenarios a little more in detail
a) Income deemed to have been applied
the assessee has an option to:
Such option is to be exercised in Form 9A to be furnished electronically with or without digital signature by the trust within the time allowed for filing return of income u/s 139(1).
b) 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.
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 upto 6 years | 6th year |
| Donated to trust registered under Section 12AA or 10(23C) | Year in which income is so donated |
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:
No exemption is available to the following incomes of trust/institution:
**Specified person for this purpose are as below:
The grants received from the government and other agencies are beneficial for such trusts and organizations. Such grants can be used for the infrastructure development, basic facilities, health and hygiene, and overall welfare of the society. These are registered under Section 12A which exempts them from paying income tax.
Sections 12A and 80G are the most appreciable Sections in the Income Tax Act which directly and indirectly provide a lot of benefits to society. The only requirement that trusts and NGOs should fulfil is that they should follow the guidelines provided in these Sections. Various trusts and NGOs which are registered under these Sections provide maximum overall benefits to the economic development of the country through their constant social welfare. It is necessary for trusts, NGOs, and societies involved in religious or social welfare work to get themselves registered under Section 12A of the Income Tax Act by the Department of Income Tax, Government of India.