Tax Exemption for Ngos and Deduction for Donors
Tax Exemptions
1. General Scheme
The Income Tax Act, 1961, which is a national all-India Act, governs tax exemption of not-for-profit entities. Organizations may qualify for tax-exempt status if the following conditions are met:
The organization must be organized for religious or charitable purposes;
The organization must spend 85% of its income in any financial year (April 1st to March 31st) on the objects of the organization. The organization has until 12 months following the end of the financial year to comply with this requirement. Surplus income may be accumulated for specific projects for a period ranging from 1 to 5 years;
The funds of the organization must be deposited as specified in section 11(5) of the Income Tax Act;
No part of the income or property of the organization may be used or applied directly or indirectly for the benefit of the founder, trustee, relative of the founder or trustee or a person who has contributed in excess of Rs. 50,000 to the organization in a financial year;
The organization must timely file its annual income return; and
The income must be applied or accumulated in India. However, trust income may be applied outside India to promote international causes in which India has an interest, without being subject to income tax.
2. Corpus Donations
Corpus donations or donations to endowment are capital contributions and should not be included to compute the total income of the organization.
3. Business Income
Under amendments to Section 11(4A) of the Income Tax Act 1961, a not-for-profit organization is not taxed on income from a business that it operates that is incidental to the attainment of the objects of the not-for-profit organization, provided the entity maintains separate books and accounts with respect to the business. Furthermore, certain activities resulting in profit, such as renting out auditoriums, are not treated as income from a business.
4. Disqualification from Exemption
The following groups are ineligible for tax exemption: all private religious trusts; and charitable trusts or organizations created after April 1, 1962, and established for the benefit of any particular religious community or caste. But note that a trust or organization established for the benefit of “Scheduled Castes, backward classes, Scheduled Tribes or women and children” is an exception; such a trust or organization is not disqualified, and its income is exempt from taxation.
Tax Deduction for Donors
The Income Tax Act, section 80G, sets forth the types of donations that are tax-deductible. The Act permits donors to deduct contributions to trusts, societies and section 25 companies. Many institutions listed under 80G are government-related; donors are entitled to a 100% deduction for donations to some of these government funds. Donors are generally entitled to a 50% deduction for donations to non-governmental charities. Total deductions taken may not exceed 10% of the donor’s total gross income.
The following are examples of governmental charities listed in section 80G, contributions to which entitle the donor to a 100% deduction: the Prime Minister’s National Relief Fund; the Prime Minister’s Armenia Earthquake Relief Fund; the Africa (Public Contributions India) Fund; and the National Foundation for Communal Harmony.
As to those entities not specifically enumerated in section 80G, donors may deduct 50% of their contributions to such organizations, provided the following conditions are met:
the institution or fund was created for charitable purposes in India;
the institution or fund is tax-exempt;
the institution’s governing documents do not permit the use of income or assets for any purpose other than a charitable purpose;
the institution or fund is not expressed to be for the benefit of any particular religious community or caste; and
the institution or fund maintains regular accounts of its receipts and expenditure.
Note that donations to institutions or funds “for the benefit of any particular religious community or caste” are not tax-deductible. A not-for-profit organization created exclusively for the benefit of a particular religious community or caste may, however, create a separate fund for the benefit of “Scheduled castes, backward classes, Scheduled Tribes or women and children.” Donations to these funds may qualify for deduction under section 80G, even though the organization, as a whole, may be for the exclusive benefit of only a particular religious community or caste. The organization must maintain a separate account of the monies received and disbursed through such a fund.
In-kind donations are not tax-deductible under Section 80G. Receipts issued to donors by not-for-profit organizations must bear the number and date of the 80G certificate and indicate the period for which the certificate is valid.
The Income Tax Act contains a number of other provisions permitting donors to deduct contributions. Under section 35AC of the Act, donors may deduct 100% of contributions to various projects, including 1) construction and maintenance of drinking water projects in rural areas and in urban slums; 2) construction of dwelling units for the economically disadvantaged; and 3) construction of school buildings, primarily for economically disadvantaged children. Furthermore, under section 35CCA of the Act, donors may deduct 100% of their contributions to associations and institutions carrying out rural development programs and, under Section 35CCB of the Act, 100% of their donations to associations and institutions carrying out programs of conservation of natural resources. A weighted deduction of 125% is also allowed for contributions to organizations approved under section 35(1)(ii) (a scientific research institute or a university, college or other institution) specifically for “scientific research,” and for contributions made under section 35(1)(iii) specifically for “research in social science or statistical research.”
Source : CAF India