Non-governmental organisations (NGOs) include charitable trusts and non-profit institutions. These bodies help augment the government’s efforts to support social and economic well-being in underserved sections of society.
Across the globe, tax administrations have recognised these efforts and provided tax breaks and incentives to these entities. The Income Tax Act of 1961 also provides certain benefits on income tax for a charitable trust.
The Act also extends these benefits to the donors of these non-profit organisations. Read on to know more about NGO tax exemption laws and the tax benefits that donors can also enjoy.
As per the Income Tax Act, taxpayers need to pay taxes on the income generated from the following heads:
Income from salary
Income from rent from house property
Income from profits and gains from a business or profession
Income from interest and capital gains
Income from other sources
Here, the voluntary contributions that donors make to non-profit organisations aren’t considered as ‘income’. However, Section 2(24)(iia) of the Income Tax Act states that all the donations received by any charitable trust are accounted as part of its income.
The taxation of charitable trusts thus depends on this income after subtracting all the exemptions available to them.
The following table presents details about tax exemptions available to charitable trusts and non-profit entities:
Income Classification |
Tax on Form of Income |
Exemption |
Voluntary Contributions |
With particular instructions to form the corpus of the trust |
Fully exempt if registered as per Section 12AA |
Without any directions |
Considered a part of the income from a property in the trust’s custody |
|
Income from Property Under Trust’s Custody for Charitable/Religious Use |
Income used for charitable/religious purposes |
Fully exempt if registered as per Section 12AA |
Income kept aside for charitable/religious use |
85% of the income must be applied for charitable purposes in order to avail of the exemption as per Section 11 of the Income Tax Act, and only then 15% can be kept aside |
|
Donations Made Without Donee’s Identity |
A contribution to the trust of more than 5% of all the donations or ₹1 Lakh |
Tax rate of 30% |
Entirely devoted to charitable/religious use |
Taxed similarly as voluntary contributions without any instructions |
|
Capital Gains from Assets Held by the Trust |
Gains used entirely for procuring a new capital asset |
Fully exempt if registered as per Section 12AA |
Gains used partially for procuring a new capital asset |
The remaining gains are considered to be employed for charitable purposes and are exempt |
|
Income from Property Under Trust’s Custody for Charitable Purpose Promoting Global Welfare |
Not included in the net income for calculating tax liabilities as per the Central Board of Direct Taxes |
Fully exempt if registered as per Section 12AA |
Donors can also enjoy a reduction in tax liabilities under Section 80G of the Income Tax Act. In most cases, donors can enjoy a tax exemption of up to 50% of the amount of donation made.
However, note that you can claim a deduction only if that charitable trust is registered under Section 12AA by the Commissioner of Income Tax.
The income received from a property under the trust used entirely for charitable purposes is taxable if it exceeds the extent of exemption under Sections 11 and 12.
The charitable trust income tax slab rate for such an earning will be taxable as per the applicable taxation rates for the Association of Persons.
However, if a charitable trust has to forego the exemptions under Section 11 due to a default, the income will be taxed based on the highest income tax slab that applies.
Here are a few instances when exemptions remain inapplicable:
When the entire property income is held for private religious purpose and not for the benefit of public
When the income is generated to meet certain indirect benefits of any religion or caste
When the income benefits only the specified person, such as the founder of the trust
When the entire income is not invested as mentioned
Remember, tax benefits are available to charitable and non-profit organisations only if they are registered under Section 12AA. Moreover, they can avail of tax exemptions under Sections 11 and 12 on income tax of a charitable trust.
In addition, donors can also enjoy tax benefits as Section 80G allows them to claim a 50% deduction on what is contributed.
Yes, you can claim NGO tax exemption of up to half of the amount of donation you make under Section 80G of the IT Act.
Yes, a charitable trust needs to be registered by the Commissioner of Income Tax under 12AA of the Income Tax Act to enjoy tax exemptions.
To avail of NGO tax benefits, a charitable trust or non-profit organisation needs to register itself using Form 10A.
For income exceeding the limit of exemptions under Sections 11 and 12, charitable trusts need to pay taxes. The charitable trust tax rate in such cases is similar to tax rates applicable to the Association of Persons (AOPs).