Section 12 Income Tax Act

Under Section 12A of the Income Tax Act 1961, non-profit organizations such as charitable foundations, charities, NGOs, and religious organizations are entitled to tax exemption. In this article, you will get to know about section 12 income tax act. Let’s dive into it.

These tax breaks were introduced in recognition that non-profit organizations act for the public good, not for profit. They are exempt from Section 11 and Section 12 taxes for their selfless contribution to society.

However, to receive such tax benefits, the individual must be registered under the criteria of Section 12A of her ITA. If the nonprofit does not register under 12A, all future financial transactions and income will be considered taxable.

What Is Section 12 A of Income Tax Act

Charities, non-profit/non-governmental organizations (NPOs/NGOs), welfare societies, religious institutions, and Section 8 corporations may apply to Section 12A to claim full tax exemption under Sections 11 and 12. 

It is important to note that income from property held for religious and charitable purposes is exempt under Section 11. In contrast, Section 12 provides income deductions for any donations received by charitable or religious organizations from donors.

If certain entities engaged in charitable activities are not registered under Section 12A, their income or financial transactions are taxable. For example, an NGO receives a donation of Rs 10 lakh rupees from an individual as a voluntary donation. If that particular NGO is not registered under Section 12A of the ITA, the amount received as a donation will not be tax-exempt. Instead, you will be taxed on the gross amount received in accordance with the IT Act.

Benefits of Section 12A

One of the benefits of Section 12A is that once a trust, NGO, or agency establishes its activities, it receives a 15% tax rebate on its income if it invests that money in charitable or welfare activities. You may not use the specific amount of the discount for personal purposes.

Registration under 12A is required to receive funding from the central or state government. However, personal or family foundations are not eligible for the Section 12A exemption.

What Is a 12A Deduction

To be able to claim an exemption according to section 11, the following requirements must be met:

Trusts must be established for legitimate and charitable or religious purposes.

Income-earning property must be held within the framework of a trust or other legal obligation.

Assets must be held for charitable or religious purposes. Charitable foundations established after April 1, 1962, must meet additional conditions to apply for the exemption.

Trust should not be established in favor of any particular religion or caste.

Income that directly or indirectly benefits a specific individual. When Assets are used for charitable purposes only.

The exemption can be granted for such income used for charitable or religious purposes in India.

Why Is Section 12 Important

Here are a few points to know why section 12 is important:

1. Regular renewal of registration is not required. Therefore, you can claim the registration privilege NGO if you want.
2. Registrations granted under Section 12A shall be treated as one-time registrations. Once registered, your registration is valid until the date of cancellation.
3. Accumulation of income that counts as an income claim does not count towards the beneficiary’s total Income.
4. Income earned is exempt from income tax.
5. Assets used for charitable or religious purposes are considered the use of income.
6. Income claims relate to expenses used for charitable or religious purposes to calculate a nonprofit’s taxable income.

What Is Difference between 12A & 12AA

The primary difference between Section 12A and Section 12AA is that the former contains provisions regarding the application of Sections 11 and 12. Section 12AA of the Income Tax Act, on the other hand,  how to register under Section 12AA.

The overall benefits of registering under Section 12A and Section 12AA are:

1. Income is tax-exempt.
2. Gain an edge in FCRA registration.
3. Prioritize when receiving grants from the government, shipboard, or other agencies.
4. Entities registered under Section 15A may claim benefits on 15% or less of their income from religious or charitable activities.
5. Expenditures on charitable or religious activities or income claims are not included in gross income and will be exempted from tax.

To take advantage of these benefits and save taxes, nonprofit organizations should consider registering with Section 12A of the Income Tax Act. In order to maximize all the benefits that fall within the purview of Articles 11 and 12, non-profit organizations should do some research advanced.

Which Documents Are Required for 12A Registration

In addition to Form 12A, applicants are required to submit a number of other important documents. Here is a list of self-certification documents that corporations, trusts, and companies must share –

1. Copy of registration with Registrar of Companies (ROC)/public trust/company or legal entity.
2. Know your member’s customer information (KYC).
3. PAN Card Details for Trusts, Corporations, and Institutions.
4. Copies of company office utility bills, rental agreements, and no objection certificates (NOC).
5. Certified copy of incorporation registration of trust/welfare organization.
6. A notice providing full details of the activities of such an organization.
7. A self-certification document emphasizing an order issuing a registration under section 12A, 12AA, or 12AB, as the case may be.
8. Appropriate evidence to support the articles of incorporation of the trust or company.
9. Self-certified copy of foundation or company annual accounts.
10. Self-certified copy of application or rejection letter.

Frequently Asked Questions (FAQs):-

How many days will it take to get 12A certificate?

On average, 12A registration in India takes 1-3 months. However, once a trust is registered, it remains valid for the life of the trust and does not need to be renewed.

Who can be section 12 approved?

Section 12AA(2) states that both approval and denial orders issued by the Commissioner should be filed before the expiration of the six-month period.

Conclusion

Now, you have got covered all questions about Section 12 Income Tax Act. Under Section 12A of the Income Tax Act 1961, non-profit organizations such as charitable foundations, charities, NGOs, and religious organizations are entitled to tax exemption. These tax incentives were introduced recognizing that non-profit organizations act for the public good, not for profit.

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