section 80g, 80g deduction, section 80g of income tax act, section 12a, section 12a of income tax act

Understanding Sections 12A & 80G of Income Tax Act

 

Introduction

Non-Governmental Organizations (NGOs) play a crucial role in addressing social, economic, and environmental challenges globally. These organizations operate independently of government control and are typically driven by social, cultural, or environmental objectives.

 

Tax exemption is a critical aspect of NGO operations, as it enables them to allocate more resources towards their charitable activities. Under the Income Tax Act, 1961, certain provisions grant tax exemptions to registered NGOs, thereby incentivizing philanthropic initiatives and promoting social welfare. Sections 12A and 80G of the Income Tax Act, 1961, provide mechanisms for NGO registration and tax exemption under Section 11 and 12 Income Tax Act, 1961.

Section 12A 

Section 12A of Income Tax Act provides that the organizations engaged in charitable or religious activities can apply for registration with the Income Tax Department to claim tax exemption. Once registered, the income of the organization, if applied towards charitable or religious purposes, becomes exempt from taxation.

Eligibility Criteria

  • The organization must exist solely for charitable or religious purposes.

  • It cannot be for the benefit of any particular religious community or caste.

  • It must apply its income towards its stated charitable or religious objectives.

  • The organization should not engage in any commercial activities.

Registration Process 

  1. Application Submission: The entity seeking registration, such as a trust, society, or institution, needs to fill out Form 10A prescribed by the Income Tax Department. This form can be downloaded from the official website of the Income Tax Department or obtained from the local tax office. Along with Form 10A, various documents need to be prepared and submitted.

  1. Submission to the Commissioner of Income Tax (Exemptions): The completed Form 10A along with the required documents is submitted to the office of the Commissioner of Income Tax (Exemptions) having jurisdiction over the area where the entity is located.

  1. Scrutiny by the Commissioner: The Commissioner scrutinizes the application and documents submitted to ensure of the provisions of Section12AA the Income Tax Act, have been complied with. The scrutiny may involve verifying the genuineness of the charitable or religious activities carried out by the entity and the utilization of its income for such purposes.

  1. Grant of Registration: If satisfied with the application and compliance with the relevant provisions, the Commissioner grants registration under Section 12A of the Income Tax Act. Once registered, the entity obtains tax-exempt status, and its income, if utilized for charitable or religious purposes, becomes eligible for tax exemption.

Documents Required under Section 12A to File Form 10A

  • Company / Trust / Society registration certificates / registration documents

  • Copy of PAN card of the directors / trustees

  • Copy of Aadhaar Card of the directors / trustees

  • Digital signature of one of the directors / trustees

  • By Laws of this company, AOA, MOA copies

  • Audit reports for past 3 years

  • Activity and Progress/Project Report of past 3 years

 The Finance Act 2020 introduced Section 12AB which deals with the procedure for fresh registration and re-registration of trusts and institutions. It replaced the earlier provision of granting registration under Section 12AA. Under this section, trusts or institutions applying for registration or seeking renewal of registration are required to do so in the prescribed manner and form. The Commissioner of Income Tax (Exemptions) evaluates the application and grants registration or re-registration, as the case may be, subject to the fulfillment of specified conditions.

Section 80G: Tax Deductions for Donors

Section 80G of Income Tax Act largely deals with charitable gifts, with the goal of providing tax benefits to those who engage in philanthropic activities. Donations to specific funds or charities are eligible for tax deductions under this clause. When an individual pays any amount for a donation or a charity at that time, an individual can claim that amount as a tax deduction under section 80G of the Income Tax Act.

  1. Eligible Donations: Donations made to NGOs registered under Section 80G are eligible for tax deductions. The donations must be made to institutions or funds approved by the Income Tax Department under Section 80G.

  1. Donation Limit: The Income Tax Act prescribes the maximum limit up to which donations are eligible for deduction. Donors can claim deductions of up to 50% or 100% of the donated amount, depending on the nature of the recipient organization and the provisions of Section 80G.

  1. Submission of Proof: Donors need to obtain a receipt from the NGO for their donation, specifying the registration details under Section 80G. This receipt serves as proof while filing income tax returns to claim the deduction, ensuring compliance with the provisions of Section 80G.

Certain requirements that need to be fulfilled under Section 80G

  • Donations made with non-taxable income are not eligible for a tax deduction. Therefore, only income that is allowable for the exemption will be considered for donation.

  • Donations in form of cheque or electronic mode is are permitted , donations in the form of cash, clothes, food, medications, and other items are excluded under Section 80G of income tax act.

  • When it comes to donations to the Indian Olympic Association, only companies are eligible for tax deductions.

  • Donations to legitimate and registered trusts are the only ones that qualify for tax deductions.

  • Any donation to Foreign Institutes or a political party will not be considered under Section 80G of Income Tax Act.

Documents required for claiming deductions for donations under Section 80G   

  • A person’s name

  • Person’s PAN

  • Address of an Individual

  • Amount of donation

  • The amount that can be deducted

  • Donation Receipt

  • Donation Certificate in Form 10B

Compliance Requirements for Registered NGOs

Registered NGOs are subject to compliance requirements to maintain their tax-exempt status, including:

  • NGOs must file annual income tax returns and audited financial statements with the authorities within the stipulated timeframe.

  • Proper books of accounts and records must be maintained to accurately reflect the NGO’s financial transactions and activities.

  • NGOs must comply with regulatory guidelines and statutory provisions governing their operations, including the utilization of funds and reporting requirements.

Benefits of Tax Exemption for NGOs

Tax exemption offers several benefits to NGOs, including:

  • NGOs can allocate more funds towards their charitable activities as they are exempt from paying income tax on their earnings.

  • Tax-exempt status enhances donor confidence and encourages contributions from individuals and organizations seeking tax benefits on their donations.

  • Tax exemption promotes the sustainability of NGOs by reducing their financial burden and enabling them to focus on achieving their social objectives.

Relation between Sections 12A and 80G

  • Section 12A of Income Tax Act deals with the registration of charitable trusts and institutions for exemption from income tax on surplus income generated from charitable activities.

  • Section 80G deals with the approval of such trusts or institutions for tax benefits to donors contributing to them.

  • Registration under Section 12A is a prerequisite for seeking approval under Section 80G. Approval under Section 80G further enhances the credibility of the trust or institution and encourages donations by providing tax benefits to donors.

 Application for registration under section 12AB and 80G can be applied together or it can be applied separately. If an organization wants to apply for both registrations separately, the application for registration u/s 12AB will be applied first. Getting 12AB Registration is mandatory for application of registration u/s 80G of Income Tax Act, 1961. Thus, both sections work in attempt to promote charitable activities and incentivize donations for social causes.

 

FAQs on Section 12A/80G Registration

1. Can an organization apply for both Section 12A and Section 80G registration simultaneously?

Yes, an organization can apply for both Section 12A and Section 80G registration simultaneously or separately. However, the criteria and documentation requirements for each registration may vary. If an organization wants to apply for both registrations separately, the application for registration u/s 12A will be submitted first. Getting 12AB registration is mandatory for the application of registration u/s 80G of the Income Tax Act, 1961.

 

2. What is provisional 12A registration? 

Provisional 12A registration is a temporary registration that needs to be converted into permanent registration within six months before it expires or within six months from the date it commences. This provisional registration allows organizations to operate while their application for permanent 12A registration is processed. To convert provisional registration to permanent status, the organization must apply for regular approval under Section 10AB, which grants a five-year validity after verification.

 

3. How long does it take to obtain Section 12A registration? 

Section 12 A registration can be sought at least 1 month before the commencement of the previous year relevant to the assessment year from which the said registration is taken.

 

4. Can foreign donations be accepted by organizations with Section 12A/80G registration? 

Yes, organizations with Section 12A/80G registration can accept foreign donations, subject to compliance with Foreign Contribution Regulation Act, 2010 (FCRA) regulations.

 

5. Can a revoked Section 12A/80G registration be reinstated?

Yes, a revoked Section 12A/80G registration can be reinstated by submitting a fresh application under Section 12AB to the concerned authorities and fulfilling the necessary requirements.

 
6. What types of donations qualify for the Section 80G deduction?

Only those donations made to registered charitable institutions qualify for 80G deduction. Cash donations are only accepted up to INR 2000/-.

 

7. Are there any restrictions on the end use of funds received by organizations with Section 12A/80G registration? 

Yes, organizations with Section 12A/80G registration are required to utilize the funds received for charitable purposes only as per the objectives mentioned in their registration documents. Misuse of funds can lead to penalties and the revocation of registration.

 

Conclusion

Form 10A must be filed in accordance with the instructions of the Income Tax Department, sent with the required supporting documents and approved for scrutiny by the Commissioner of Income Tax (Exemptions) in order to register entities such as trusts, corporations or institutions. Income used for charitable or religious purposes is exempt from taxation if section 12A registration is granted in accordance with section 12AA. Section 80G of the Income Tax Act allows donors to deduct their contributions from taxes, provided they meet specific requirements and provide supporting documentation for registered NGOs. NGOs that have obtained registration status are required to ensure compliance by submitting annual tax returns and following guidelines. The benefit of tax exemption for NGOs is increased donor confidence and more funds available for charitable purposes. Sections 12A and 80G together encourage the development of charitable endeavors and encourage donations for social purposes.

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