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.

Understanding Taxation for Charitable Trusts and Non-Profits

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. 

Exemptions Available to the Charitable Trusts and Non-Profit Organisations

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

Tax Benefits Available to Donors

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.

Applicable Rate of Taxation for Charitable Trusts

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.

Conditions When Exemptions Are Not Applicable

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.

FAQs on Taxation of Charitable Trusts and Non-Profit Organisations

Can I claim tax exemption on my donation under Section 80G of the Income Tax Act?

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.

Does a charitable institution need to register under the Income Tax Act to avail of exemptions?

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.

Which form is needed for registration of a charitable trust under the Income Tax Act?

To avail of NGO tax benefits, a charitable trust or non-profit organisation needs to register itself using Form 10A. 

What is the charitable trust income tax slab rate?

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).

Earn interest up to 8.50% p.a. by investing in a Bajaj Finance Fixed Deposit | Rated CRISIL AAA/ STABLE and [ICRA]AAA(stable) Invest Now
Home
active_tab
Loan Offer
active_tab
Download App
active_tab
Credit Score
active_tab