New Income Tax provisions for Charitable Trusts & Philanthropist

The world is facing an unprecedented challenge with communities and economies everywhere affected by the growing COVID-19 pandemic. This global outbreak has made the governments, organisations and individuals across the world

The world is facing an unprecedented challenge with communities and economies everywhere affected by the growing COVID-19 pandemic. This global outbreak has made the governments, organisations and individuals across the world  to step forward with the common aim of supporting the cause of eradication of this virus. The support can be seen by way of setting up of charitable institutions/ organisations, donations received from outside India as well as within the country.

It  thus becomes imperative to understand the implications, registrations and related compliances under the Income tax act in India considering the fact that budget 2020 has brought pertinent and substantial changes under relevant sections of the Income Tax Act in India impacting the

  • Charitable Institutions,
  • NGO’s,
  • Specified institutions such as hospitals/ universities claiming income tax exemption in respect of income derived from property held for specified charitable purposes.
  • donors claiming deduction under income tax in respect of donations made to above institutions.

Though the amendments proposed are in the nature of compliances, however, it will directly impact the availability of income tax exemptions to such institutions as well as the to philanthropists donating to such institutions. The amendments proposed will be effective from 01st October 2020 (Earlier the said amendment was effective from 01st June 2020, however due to outbreak of novel corona virus and consequent lockdown, the date has now been extended till 01st October 2020).

At this point, let us understand the existing as well as the proposed provisions under the Income tax Act in India.

Existing provisions

Under the existing Income Tax Law, charitable trusts and specified institutions are exempt from income tax in respect of income derived from property held for charitable and religious purposes. The exemption registration is valid for an indefinite period without any requirement of renewal unless cancelled by the authority in case of any default.

To streamline the application, registration process and ensure that the conditions of approval or registration are followed by such charitable trusts and specified institutions, the Union Budget 2020 proposed the changes keeping in mind the complete eradication of fraudulent institutions or organisations not satisfying the conditions of charitable activity.

Provisions effective from October 01, 2020:- Such provisions shall be applicable to:-

  1. Existing entities registered as Charitable Institutions/ NGO/ Trusts under relevant sections of Income tax Act (i.e. Section 10(23C), Section 12AA, Section 35, entities registered under Section 80G) [“Existing Entities”]
  2. New entities desirous of obtaining registration as Charitable Institutions/ NGO/ Trusts under sections (ibid) of the Income tax Act [“New Entities”]
S. No. Particulars Provisions applicable to all the Existing Entities w.e.f. October 01, 2020 Provisions applicable to New Entities desirous of obtaining registration w.e.f. October 01, 2020
1. Application for registration Compulsorily filing of fresh application ONLINE for renewal of registration by existing entities. Initially ONLINE application for provisional registration is to be filed by the applicant
2. Due date for filing application By 31st December 2020 else registration gets annulled. In that case provisions of fresh application as new entity will apply. ONE month prior to the commencement of the previous year in in which the registration is sought.
3. Whom to file registration Principal Commissioner of Income Tax (“Commissioner”) who can call for vital information or documents to ensure the entity has not violated any law relating to trust. Commissioner who will grant provisional registration immediately without making a detailed enquiry.
4. Time period for disposal of application by Commissioner Within 3 months from the end of the month in which the application is received. However, till the time application is under process, the existing registration stands valid. Within 1 month from the end of the month in which the application is received.  
5. Validity of registration 5 years. Provisional registration is valid till earlier of below events:- -          upto 6 months from the date of commencement of activity OR -          3 years
6. Next Step subsequent to grant of provisional registration Not applicable Regularizing the Registration:-Before the expiry of provisional registration (i.e. at least six months prior to expiry of provisional registration or within six months of start of activities, whichever is earlier), another application is required to be filed to the Commissioner who will make detailed investigation and call for vital information or documents essential for granting exemption. The Commissioner will then grant registration on its satisfaction and such approval which shall be valid for 5 years.

 

Common provisions for Existing and New Entities w.e.f. October 01, 2020

Renewal of Registration:- The applications for renewal of regular registrations will be required to be filed within the period of six months prior to expiry of 5 years validity period of registration.

Amendment in Object clause:- In case of alteration in object clause, entities are require to file an application within 30 days from the date of modification. The Commissioner will pass the order within 6 months from the end of the month in which application is received post verification and satisfaction pertaining to vital information/ documents. The order will be valid for 5 years.

Other Provisions relating to donations effective from June 01, 2020

Donations under Section 80G:- Pertinent amendment mentioned as under has been brought in order to curb the menace of fraudulent deductions claim by the donors:-

  1. Compliances for Entities:- Every charitable trusts & specified institutions registered under the Section 80G of the Income Tax Act shall be required to file a statement of donations in the prescribed manner and format in respect of the donations received w.e.f. June 01, 2020. The entities shall be liable to pay a penalty of INR 250 per day of delay in reporting to file a statement.

  2. Condition for claiming deduction for Donors:- Further, deduction shall be available to donors/ philanthropist based on information relating to donation furnished by such charitable trusts & specified institutions.

Restriction of Cash Donation:- The deduction of cash donation under Section 80GGA of the Income Tax Act 1961 shall be restricted to INR 2,000 (earlier INR 10,000). Thus, donations to the fund exceeding INR 2,000 are deductible only where paid other than in cash w.e.f. June 01, 2020.

Conclusion

The proposed registration process and compliances thereto for charitable entities will now be more streamlined resulting in  reduction of fraudulent transactions. It is therefore imperative for the charitable institutions to get online registrations otherwise income tax exemption shall not be available to such entities even if engaged in charitable activities.