Charitable Trusts and NGO – Income Tax Benefits

Did you know charitable deeds and compassion can help you save tax? Section 80G of the Indian Income tax Act provides provisions for that. As per 80G, you can deduct your donations to Central and State Relief Funds, NGOs and other charitable institutions from your total income 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.

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 voluntary help either in money or kind to the needy. Collective efforts are always more fruitful. Hence, there are various Non-Governmental Organisations (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.

Income tax on Charitable Institution or Trust

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

How should Income be applied to be exempt?

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:

• Relief of the poor
• Education
• Yoga
• Medical relief
• Preservation of environment (monuments or places or objects of artistic or historic interest
• Advancement of any other object of general public utility. However, if any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration is not considered to be for charitable purposes, irrespective of the nature of use or application, or retention of the income from such activity unless:
• such activity of trade/commerce/business is undertaken in the course of the actual carrying out of such advancement of any other object of general public utility and
• the aggregate receipts from such activity/ activities during the financial year does not exceed 20% of the total receipts of the said trust or institution during that financial year

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.

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 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
• 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 2 scenarios a little more in detail 

Income deemed to have been applied  

• the whole or any part of the income has not been received during the previous year; or
• for any other reason, the assessee has an option to:
• apply such income referred to in clause (i) for such purposes during the previous year in which it is received or during the previous year immediately following the said previous year
• apply such income referred to in clause (ii) 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 with or without digital signature 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 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
• 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 5 years
• 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:

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 irrespective of their designation nomenclature;
• 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

Section 11 – Income from Property Held for Charitable or Religious Purposes

Any income derived from the property held under trust for charitable or religious purposes shall not form part of the total income subject to the provisions contained in section 60 to 63 for clubbing of income. The income which shall not form part of the total income of the trust includes following:

• Any income derived from the property held under trust for charitable or religious purposes provided such income is utilised for charitable or religious purposes in India. However if such income is not utilised for these purposes but accumulated or set apart for the purpose of its application for these purposes then also such income shall not form part of the total income. Maximum of 15% of the total income derived from such property is allowed to be accumulated or set apart.

• Any income derived from property held partially under trust (incorporated before commencement of Income-tax Act) provided such income is utilised for charitable or religious purposes in India. However if such income is not utilised for these purposes but accumulated or set apart for the purpose of its application for these purposes then also such income shall not form part of the total income. Maximum of 15% of the total income derived from such property is allowed to be accumulated or set apart.

• Any income which is derived from a property held under the trust created on or after April 1, 1952, only for charitable purpose and is tending to promote international welfare in which India is interested. However such income is exempted to the extent to which such income is applied for welfare purposes outside India. However, in case of a charitable or religious trust which is established before April 1, 1952, exemption is available if the income is applied to such welfare purposes outside India.

Further any income in form of voluntary contributions which are made with the specific direction that these contributions shall form part of corpus of a trust or institution shall not form part of the total income. While computing 15% of the total income for the purpose of computing the extent to which exemption shall be allowed in first two cases voluntary contributions referred under section 12, if any, shall also form part of the total income.

Capital Gains:

When a capital asset which was held under trust wholly for a charitable or religious purpose is transferred and whole or a part of the net consideration is being utilized to acquire any other capital assets to be held for the same purpose, then the capital gain arising from the transfer of such an asset shall deemed to have been applied to charitable or religious purposes to the following extent-

1. When the whole of net consideration is utilised in acquiring the new capital asset, the whole of such capital gain.
2. Where only part of net consideration is utilised for acquiring the new capital asset, then only such capital gain shall be exempted which will be equals to the amount by which the cost of new asset exceeds the cost of the transferred asset.

For example: If cost of the asset transferred was Rs. 20 lakhs and the amount of capital gains is Rs. 10 lakhs. The new asset is acquired for Rs. 25 lakhs then the amount of capital gain which will be exempt shall be computed as: Capital Gain to be exempt = Cost of new asset – cost of transferred asset I.e. Rs. 25 lakhs – Rs. 20 lakhs = Rs. 5 Lakhs

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 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.

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