Charitable trusts and NGOs play a vital role in improving society and supporting religious or humanitarian causes across India. The government recognizes their contribution and offers several tax benefits under the Income Tax Act. This article discusses the tax benefits, exemptions, and the process of filing income tax returns for charitable trusts and NGOs, allowing organizations to understand how to maximize their tax advantages while ensuring compliance.
Charitable Trusts – A Brief Overview
A charitable trust is an organization set up with the primary aim of supporting public welfare activities, such as providing relief to the poor, promoting education, or advancing religious causes. In India, charitable trusts are granted specific tax exemptions and benefits to further their mission. However, to qualify for these exemptions, the trust must adhere to various criteria set forth by the Income Tax Act, including maintaining proper documentation and ensuring their operations align with charitable purposes.
Eligibility for Exemption under the Income Tax Act
To avail of the tax benefits, charitable trusts need to meet the following conditions under Section 11 of the Income Tax Act:
- Registration: The trust must be registered under Section 12A of the Income Tax Act with the Commissioner of Income Tax. This registration is essential for the trust to claim the benefits.
- Trust Deed: The property of the trust must be governed by a legal trust deed, which outlines the trust’s objectives and operations.
- Charitable or Religious Purpose: The primary purpose of the trust must be charitable or religious. The activities should focus on the welfare of the public and not benefit any specific community or caste.
- Public Benefit: The trust’s income should be used for public welfare and should not serve the private interests of individuals, including the settlor or close relatives.
- Income Application: The trust’s income must be applied solely for the purposes of charity or religion, not for the personal use of any individuals.
- Audit Requirement: If the trust’s income exceeds the basic exemption limit, the trust must get its accounts audited.
Taxability of Charitable Trusts
While charitable trusts are generally exempt from income tax, there are circumstances where their income becomes taxable. Here’s how income tax applies:
- Exempt Income: Income used directly for charitable or religious purposes is exempt from tax.
- Taxable Income: Income that is not applied for charitable purposes or is used for non-charitable activities will be subject to tax, following the tax rates for an Association of Persons (AoP).
Tax Rates for Non-Exempt Income
| Income Range | Tax Rate |
|---|---|
| Income up to ₹2.5 lakh | No tax |
| Income between ₹2.5 lakh to ₹5 lakh | 5% of taxable income above ₹2.5 lakh |
| Income between ₹5 lakh to ₹10 lakh | ₹12,500 + 20% of taxable income above ₹5 lakh |
| Income above ₹10 lakh | ₹1,12,500 + 30% of taxable income above ₹10 lakh |
Surcharge Rates for Non-Exempt Income
| Income Range | Surcharge Rate |
|---|---|
| Income above ₹50 lakh | 10% of Income Tax |
| Income above ₹1 crore | 15% of Income Tax |
| Income above ₹2 crore | 25% of Income Tax |
| Income above ₹5 crore | 37% of Income Tax |
Cess on Income Tax
| Cess | Rate |
|---|---|
| Cess on Income Tax + Surcharge | 4% of the total income tax and surcharge amount |
Tax Rate for Violations of Trust Conditions
If a trust violates its conditions and forfeits its status as a charitable trust, its income will be taxed at the maximum marginal rate (MMR) of 42.744%. This rate applies to the income that was forfeited due to the violation of the conditions, in addition to the standard tax rates for other income.
Tax Rate for Trust Converted to Non-Charitable Trust
When a charitable trust converts into a non-charitable trust, it will face a tax rate of 42.744% on its accreted income. Accreted income refers to the total fair market value of assets minus liabilities. In addition to this, regular income tax will apply to other types of income.
This section ensures that charitable trusts that fail to maintain their charitable status are subject to penalties, thus reinforcing the importance of compliance with tax laws.
Documents Required for Registration under Section 80G and 12AB
To avail tax exemptions and benefits under Sections 80G and 12AB of the Income Tax Act, a charitable trust must submit the following documents for registration:
- PAN Card of the Trust: A copy of the trust’s Permanent Account Number (PAN) card is essential for verification and identification purposes.
- Trust Deed or MoA (Memorandum of Association): A certified copy of the trust deed or MoA that defines the objectives and operations of the trust.
- Registration Certificate and NOC (No Objection Certificate): If applicable, a registration certificate from relevant authorities and an NOC from the respective local body or government.
- Latest Financial Statements and Audit Reports: Audited financial statements for the last three years, which must be certified by a qualified Chartered Accountant.
- Bank Statements and Books of Accounts: Copies of the bank statements and books of accounts for the last three years, providing proof of income and expenditure.
- A Detailed List of Welfare Activities: A comprehensive list of charitable activities conducted by the trust during the previous years, along with supporting documents.
Income Tax Return Filing for Charitable Trusts
If a charitable trust’s income exceeds the basic exemption limit, it is required to file income tax returns. Additionally, certain types of trusts must file returns regardless of income. These include:
- Research Associations
- News Agencies
- Educational Institutions
- Mutual Funds
- Trade Unions
- Infrastructure Funds, etc.
Filing income tax returns ensures compliance and helps maintain the trust’s tax-exempt status.
Due Dates for Filing Income Tax Returns
The due dates for filing income tax returns depend on the type of trust and whether an audit is required:
- September 30: For trusts that require an audit under the Income Tax Act or other relevant laws.
- November 30: For trusts required to file Form 3CEB, which pertains to related party transactions.
- July 31: For trusts that do not require an audit.
Trusts must adhere to these deadlines to avoid penalties and maintain their tax-exempt status.
How to File Income Tax Return for Trusts
Charitable trusts must file their income tax returns using the appropriate form based on their income and registration:
- ITR 5: For trusts with taxable income exceeding the exemption limit.
- ITR 7: For trusts required to file under Sections 139(4A), 139(4B), etc. (typically for organizations such as research associations, mutual funds, or educational institutions).
All trusts must e-file their returns. If the trust is required to undergo an audit, the return must be submitted with the digital signature of the Chartered Accountant who conducted the audit.
What Happens if 85% of Income is Not Applied?
To retain its tax-exempt status, a charitable trust must apply at least 85% of its income for charitable purposes. If the trust fails to do so:
- Deemed Application: If income is not immediately used but is considered for charity purposes, it can still be exempt.
- Accumulation: The trust may accumulate income for up to five years for future charitable activities, provided the income is invested in prescribed modes.
Taxation for Non-Compliance
If the trust fails to apply its income in line with the conditions, the income will be taxed at the applicable rates. This highlights the importance of adhering to the 85% income application rule to avoid tax liabilities.
Investment of Accumulated Income
If a charitable trust accumulates income for future use, it must invest it in specified modes to ensure that the income remains tax-exempt. These modes include:
- Government Bonds and Securities
- Fixed Deposits in Scheduled Banks
- Investments in Public Sector Companies
- Immovable Property
These investments help the trust earn a return on accumulated funds while maintaining the tax-exempt status of the income.
Exemptions and Restrictions
While charitable trusts enjoy significant tax exemptions, there are cases where exemptions are not available:
- Private Religious Purpose: Trusts created for private religious purposes are not eligible for exemptions.
- Misuse of Trust: If the income or property of the trust benefits specific individuals (e.g., trustees or family members), the exemption is forfeited.
- Business Activities: Profits from business activities unrelated to charitable purposes are taxable unless the business is incidental to the trust’s objectives.
Conclusion
Charitable trusts can avail significant tax exemptions under the Income Tax Act, provided they comply with specific registration requirements, apply income for charitable purposes, and file returns accurately and on time. By maintaining proper records, adhering to compliance guidelines, and meeting deadlines, charitable trusts can continue to operate efficiently while enjoying the benefits offered by the government to further their social and religious missions.
A trust is taxed on income that is not used for charitable purposes. If the income exceeds the exemption limit, it is taxed based on slab rates for an Association of Persons (AoP). Violations of trust conditions lead to taxation at the maximum marginal rate (MMR).
A trust must apply at least 85% of its income for charitable purposes to maintain its tax-exempt status. If not, the income will be taxed, but any unspent income may be accumulated for up to 5 years if invested in prescribed modes.
Trusts are not automatically exempt from TDS (Tax Deducted at Source). They must comply with TDS provisions like any other entity, depending on their income and activities. Certain exemptions may apply if the trust is registered under Section 12A or 80G.
Family trusts that do not fulfill the criteria for charitable purposes are taxed like private trusts. They are subject to income tax at higher rates, and income distributed to beneficiaries is taxed in their hands, unless specific exemptions apply under relevant tax laws.
Charitable trusts are exempt from income tax if their income does not exceed the basic exemption limit. If the income exceeds the limit, the trust must file income tax returns, and the income will be taxed based on applicable rates.
If a trust fails to apply at least 85% of its income for charitable purposes, the income will be taxed. However, income can be accumulated for up to 5 years if invested in specified modes as per the Income Tax Act.
A trust can engage in business activities, but only if the activities are incidental to its charitable objectives. Any profit from business activities unrelated to charitable purposes will be taxable unless specifically exempted under the Act.
To apply for registration under Section 12A and 80G, the trust needs to submit documents such as its PAN card, trust deed, financial statements, and a detailed list of welfare activities. These are required to avail tax benefits and exemptions.