Income Tax Filing for Section-8/Non-Profit/Trust/NGO

Income Tax Filing for Section 8 Company or NGO is different from normal tax filing, where many other things are needed to be taken care of to avoid any notices in future. Every trust, shall, if the total income before exemption under section 11 and 12 exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year.

About This Plan

Income Tax Filing for Section 8 Company or NGO, prepare your business accounts and file returns with TAXAJ.

Timeline

It usually takes 3 to 5 working days.

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Services Covered

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How It's Done

Documents Required

Services Covered

Account Summary - Income & Expenses Statement and Balance Sheet (up to 250 entries per year)
Expert Assisted Tax Filing for business and professionals
Tax Savings & Planning Advice
Documented follow up

Who Should Buy

Not for Profit Organisation
Section 8 Company
Trust

How It's Done

Purchase of plan
Upload documents
Financial Statements Preparation
Review computation sheet
Return filed & acknowledgement generated

Documents Required

KYC, Email, Phone No. of Trust
Bank statements for the financial year
Income and Expense statements
Previous Auditor reports

All you need to know about Taxation of a NPO, NGO, Trust Organisation!

All About NGO's and their Tax Filing in India

Number of NGO’s in country is estimated to be 31 Lakhs as compared to the total population of 1.28 billion. Comparatively, the number of NGO’s is highly inadequate.

Examples of NGO’s –

Child Rights and You commonly abbreviated as CRY is a non-profit organization working in India, which aims to restore children’s rights.
Help Age(NGO India) – A Non Profit Organization in India caring for disadvantaged elderly senior citizens

Formation of NGO

NGO’s have multiple options to select the form of constitution. The different forms of constitution which can be chosen:

a) Trust

b) Society

c) Section 8 Company

Selection of form depends on various factors. Some of the factors are as below:

I. Size of the institution

II. Cost

III. Number of persons required

IV. Compliances

V. Global Appearance

Apart from it there are various other factors which may be considered while selecting a particular form for NGO. Each form of constitution has its own enactment and the provisions contained therein would apply to the respective form:

a) Trust– Trust is created for the purpose of charitable and religious purposes. Trust can be constituted by Trust deed. In case of formation of trust there are no specific statues available. However, charitable endowment act’1890 and Charitable and religious act’1920 have bearing on the formation of a charitable trust.

b) Society– Society is an association of persons who come together by mutual consent to act jointly for common purpose. The compliance has to be made under the Societies registration act’1860.

c) Section 8 Company– Company Act’2013 applies in case of a registration of Section 8 Company. The main object of company is to give benefit to public. It is company formed for charitable objects.

It is important to note that NGO has to comply with the provisions of its governing act.

Filing of Income Tax Returns

Charity trusts or NGOs are expected to allocate at least 85% of its income to the said cause. These causes include religious as well as charitable ones. Major ones are as follows.

Education.
Relief of the poor.
Medical relief.
Yoga.
Environment conservation (this includes historical monuments, places of artistic interests among others).

Moreover, charitable institutions may require engaging in commercial activity in order to conduct their operations. For example, an orphanage for blind people may require employing the needy to produce handicrafts in order to provide them with boarding and housing. However, under the charitable act, such activities cannot constitute more than 20% of the yearly operation.

Income expenditure for repayment of the loan, for purchasing capital assets, donation to trust, and revenue expenditure registered is also treated as essential for charitable purposes and is hence exempted from tax.

Furthermore, the tax code does not define the term ‘religious purpose’ precisely. Hence, religious purposes largely refer to support and advancement of religious principles and its tenets. However, it is important to remember that this exemption available for all communities is only applicable to public trusts. It is not available to trusts which are privately owned.

Every trust, shall, if the total income before exemption under section 11 and 12 exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year.

a) Form of Income Tax Return:

ITR 7 – ITR-7 is filed when persons including companies fall under section 139(4A) or section 139 (4B) or section 139 (4C) or section 139 4(D).

b) Whether e-filing of return is mandatory for a trust?

It is mandatory for a trust to file return of income electronically with or without digital signature. A trust may also file return of income under Electronic Verification Code. However, a trust liable to get its accounts audited under section 44AB shall furnish the return electronically under digital signature.

c) Due dates for filing of return?

A trust who is required to get its accounts audited under the Income-tax Act or under any other law – September 30 of the assessment year

A trust who is required to furnish a report in Form No. 3CEB under section 92E – November 30 of the assessment year

In any other case – July 31 of the assessment year

d) What is the tax rate?

A trust is chargeable to tax as per the slab rates which are applicable to an individual (not being a senior citizen or super senior citizen).

e) Penalty for delay in furnishing return of Income

It shall pay by way of penalty a sum of Rs. 100 for everyday during which the failure continues.

Important Note:

Entities registered under section 12AA are required to file their return of income within the time allowed under section 139 of the act.

Section 80G Donations

Section 80G of the Income Tax Act’1961 provides deduction while computing the total income in the hands of donor.

It is important to note that when registration is granted under section 12A, it does not mean that section 80G approval is to be given i.e. registration under section 12AA will not provide automatic approval under section 80G. Section 80G applies only to charitable trusts or institution. It does not apply to religious trust or institutions.

The recipient of money or the donee gives a receipt of donation, based on which the donor is entitled to claim deduction provided, the donee institution is approved under section 80G of the Income Tax Act’1961.

The institution or fund should be established for charitable purposes in India.

What if 85% income is not applied?

Trusts and NGOs can find it difficult to allocate 85% of their income held under the property to the needy. In some cases, this income still receives an exemption. For example, if the tax authorities deem the institution worthy regardless. For example, charities are often prone to receiving expected income with delays. If your charity or trust has received income late from the previous year, you might not have resources to allocate. In such cases, charities are looked at as exceptions and can receive the benefit of the doubt while filling for income.

If you wish to apply for the special exemptions, you will need to exercise your rights using Form 9A. These can be sent electronically with or without a digital signature. When you are submitting your tax returns under u/s 139(1), then Form 9A needs to be submitted along with it.

Income Tax Benefits to Charitable Trusts/NGO

Let’s now have a look at the tax obligations from various categories of income of a charitable trust:

CATEGORY OF INCOME	INCOME SUBJECT TO TAX	TAXABILITY
Donations/voluntary contributions	Voluntary contributions towards the clear goal of forming a collaborative corpus of trust or institution	Exempt*
	Voluntary contribution without a clear direction	Certain forms of income like property are liable for taxation.
Anonymous donations to charities and trust which do not maintain a legal standard record of donors.	Donation exceeding higher of: i) 5% of total donations received by trust or ii) Rs 1,00,000	Taxed at 30%
	Anonymous donation received by a trust established wholly for religious and charitable purpose on	Taxable in the same manner as voluntary contributions (without specific direction) as above
Income from property held under trust for charitable or religious purpose	Income applied for charitable or religious purpose in India	Exempt*
	Income accumulated or set aside for the application towards charitable or religious purpose in India	Exempt* to the extent of 15% of such income. This means that at least 85% of income from the property is to be applied for charitable and religious purpose in India as above and balance 15% can be accumulated or set aside. [See below comment on 85%]
Income from property held under the trust created for a charitable purpose which tends to promote international welfare in which India is interested	CBDT either by general or special order has directed that such income shall not be included in the total income of trust	Exempt*
Capital gain from an asset held under trust in whole	Net consideration is utilised fully for acquiring another capital asset	Entire capital gain is deemed to have been applied for charitable and religious purpose and hence is exempt*
	Net consideration is utilised partially for acquiring another capital asset	Capital gain utilised in excess of cost of old asset transferred is considered to have been applied for charitable and religious purpose and is exempt*

Only Charitable/ religious trust or institution registered under Section 12AA enjoys the exemption

Accumulation of 85% Income of Trust

Moreover, charities can also accumulate income for specified goals under the current tax laws. For example, some charities may need to acquire properties to serve the needy. These charities can set aside funds for the assigned activities in the following manner.

These charities will be required to submit form no. 10. The form is a notice of accumulation of income by a trust or a charity institution. These forms are required to be submitted during the filing of income period and can be sent electronically.
Accumulation of income requires mentioning the purpose and time frame within which the said income would be accumulated and used.
Currently, the tax laws limit the accumulation for the period of 5 years. During these, the notice by courts or injunctions is separated as part of the tax code from the calculation of time periods.
It is important to invest or deposit money in a specified mode in order to avail this exemption.

However, if the charity fails to invest funds as specified, the funds are taxable as outlined below.

CATEGORY OF VIOLATION	YEAR OF TAXATION
If income is used for other purposes like commercial.	Same year.
Investment of income does not follow the agreed or specified schedule.	The year in which the income ceases as a future investment.
If the income is not applied or used during the 6-year period.	6th year.
Donations to trusts registered under section 10(23C) or 12AA.	The same year.

Ways to invest accumulated Income

There are also many ways for trusts and NGOs to save and invest the accumulated income and gain tax benefits in the process. As mentioned earlier, NGOs or trusts can set aside over 85% of their income. However, doing so requires one of the following routes for saving and investment.

Investment through post office savings bank or co-operative banks or scheduled banks.
Investment in government UTI/ saving certificate.
Investment in security bonds or savings options issued by the state and central government.
Trusts can also invest in company debentures, provided they are completely or unconditionally guaranteed by the state or central government.
Investment in public sector company through deposits or investment.
Invest income in publicly traded companies or in bonds. These companies aid the growth of the country’s industrial development and financing them is seen as a long-term investment in the future.
The cases of no exemptions.

Certain modes are barred from receiving any exemptions. These are as follows-

Income from private religious trusts which do not benefit the public at large. If the entire income is generated from such institutions, it does not qualify for any tax exemptions.
The entire income of religious institutions or charitable trusts which comes from serving a particular community or caste.
If the entire income is generated by serving a specific person, it is also not liable for a tax exemption.
If the modes of investment and the due process are not followed as specified.
The value of educational services and medical services made available to a specified person through charitable trusts and religious institutions.
Unless business objectives are incidental to the objectives of the charitable trust or NGOs, the income generated from it is not liable from tax exemptions.

Additionally, charitable trusts are also barred from aiding specified individuals in the process of their charitable work. These exceptions include the following.

The founder of the charitable trust or author
Individuals who have contributed substantially to charitable trusts. In these cases, anyone who makes above Rs. 50,000 in contributions are barred from benefits in the same financial year.
People in charge of charitable trusts, including managers, founders, trustees, and others.
Family members of people associated with trusts and NGOs are also barred from benefitting if they make substantial contributions.
Any person who has a substantial interest among the various designated members and if their total contributions are greater than 50% of the total income.

FAQ?

What are the forms that needs to be filed for Income Tax Return of NGO's?