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Tax benefits for non-profits

Non-profit ventures are eligible for income tax benefits (not available for private trusts) if they satisfy the requirement of operating for a ‘charitable purpose’ under the Income Tax Act, and if they obtain a registration and Section 12A of the act (see below for details). These tax benefits are available irrespective of the structure opted for by the non-profit organizations.


As per the Income Tax Act, a charitable purpose includes the following: 

  • Relief of the poor
  • Education
  • Medical relief
  • Preservation of (i) environment (including watersheds, forests and wildlife), (ii) monuments or places or objects of artistic interest, or (iii) monuments or places or objects of historic interest
  • Advancement of any other object of general public utility- Carrying out a business will not be covered in this clause, if the receipts are less than INR 25 lakhs in a year.(Note: See Section 2(15) of the Income Tax Act, 1961 and  Circular No. 11/2008 for more details).

Example: Activities of trade associations
Where the activities of industry or trade associations are restricted to contributions from, and participation of, their members only, they can qualify as being conducted for the advancement of any other object of general public utility. Participation by outsiders will render such activities as taxable (i.e. non-charitable).


So, a NASSCOM event which discusses relevant issues for the IT industry will qualify as being conducted for a ‘charitable’ purpose, if participation and collection of fee is restricted to its members, but not if non-members can also pay and participate.


i) Income tax on non-profits


Income of a non-profit organization registered under Section 12A of the Income Tax Act (procedure and conditions for registration are given below) is treated in the manner explained below:


a) Income from corpus donations

It is common non-profit ventures to raise funds through voluntary contributions or donations. Although such contributions qualify as income under the Income Tax Act (See Section 2(24)(ii), Income Tax Act, 1961and an organization, there is a special benefit provided for voluntary contributions, if they received with a specific direction that they shall form part of the corpus (See Section 12, Income Tax Act, 1961).


Key points to note:
If the donor specifies any purpose in which his contribution should be used, the non-profit organization will have to comply with such direction. 
  • To be eligible for income tax benefit, the non-profit organization must retain specified information such as the name, address and other prescribed details of the donor. Donations made without such providing such details are considered as ‘anonymous’ donations. The amount of such donation is treated as income and taxed at the maximum rate of 30%. This rule has been enacted with a view to discourage unaccounted money, i.e. money which is not disclosed in the financial statements and tax returns of the donors, from being channelized into charitable institutions [Section 115BBC, Income Tax Act].

Income from operations that is re-applied for promotion of objectives

To the extent income of an organization (from property held for charitable or religious purposes) is immediately applied towards such purposes, such income is not subject to income tax.


c) Income from commercial activities that are incidental

A trust may generate income by carrying on a business which is incidental to the attainment of its main objects. Income from such a business may also help in financing the actual objectives of the trust. Income of a trust from a business that is incidental to its main object is exempted to the same extent as under point "e" below, if separate books of account are maintained for the business.


d) Income from other commercial activities

Income from commercial activities which are unrelated to the objectives of the trust is not eligible for any tax benefits.


e) Income set aside for future purposes, for realization of objectives

If a non-profit organization is not able to immediately utilize any portion of its income for the promotion of its objectives but intends to utilize it in future for promotion of its objectives, its income will not be taxable. It may even invest the funds into certain instruments authorized under the Income Tax Act (listed below). Upto 15% of income every year, can be accumulated for utilization in future. Such income can be accumulated indefinitely. The balance 85% can be set apart and be accumulated for a maximum period of 10 years by giving a notice to the Assessing Officer in Form 10, after compliance with the following procedural requirements:


(i) A resolution passed by the governing body of the organisation to set apart the income must be filed with Form 10.

(ii) Copies of annual accounts of the organisation, along with the details of investment and utilization (if any) of the money accumulated or set apart must be furnished before the Assessing Officer within 6 months.

 The organization must indicate specific purpose or purposes for which it wants to accumulate the funds. A general decision to accumulate listing all the objects of the organization would not be sufficient.

 The money is invested in instruments specified under Section 11 of the Income Tax Act, such as:

  • Securities - bonds, promissory notes, debentures, stock or any other instruments of any State Government, Central Government, or issued under the authority of a Central or State Act, or of Indian Railways.
  • Units issued by the Unit Trust of India.
  • Any other security expressly authorized by the trust deed or notified by the Central Government or prescribed by the High Court.
  • Savings certificates, post office deposits or deposits with a bank. (The full list of instruments is provided under Section 11(5) of the Income Tax Act.)

ii) Steps for Registration under Section 12A of the Income Tax Act


For obtaining a registration under Section 12A, an application for registration must be made by the non-profit entity to the Commissioner or Director General of Income Tax (Exemptions) in Form 10A, accompanied by the following documents:

  • Copy of the instrument by way of which the trust, society or company is created, i.e. its memorandum, articles and certificate of incorporation (in case of a Section 25 company) or a registered trust deed (in case of a trust), or a registration certificate and bye-laws (in case of a society); and
  • If it existed in years prior to the year in which application is made, accounts of the prior years (not exceeding three years)

Before granting approval, the Commissioner or Director must satisfy himself about objects of the trust and genuineness of its activities. A decision must be issued within 6 months from the end of the month in which the application is made.


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