NPOs - Non Profit Organisations
Income Tax and other Legal Provisions
NPOs (Non Profit Organizations) are not exempt from criminal laws that apply to individuals or business enterprises. They are covered by following Acts:
Foreign Contribution ( Regulation ) Act, 1976 (FCRA)
- FCRA is an internal security legislation that is governed by the Ministry of Home Affairs. Any organization can receive foreign contributions only if it is registered under this Act and agrees to receive such contributions through bank. A separate bank account is required to be maintained exclusively for foreign contributions.
- Once registered, intimation has to be mandatorily sent to the Central Government regarding foreign contributions received, sources thereof, the manner in which they were received, the purpose and utilization of the same. On registration NPO must file an annual return with FCRA by 31st July every year, even in case no foreign contribution is received during the year.
- NPO may pass on funds to other NPO only if other NPO also possesses FCRA registration.
Prevention of Money Laundering Act 2002 (PMLA)
PMLA forms the core of the legal framework put in place by India to combat money laundering. PMLA, applicable to charitable institutions w.e.f. 01.06.2009 provides for rigorous punishments for acts treated as money Laundering. The law provides that whoever commits the offence of money laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend upto seven years and shall also be liable fine which may extend to five lakh rupees. Therefore, due care should be taken not to accommodate persons not known to trusts by encashing foreign cheques and drafts.
Income Tax Act, 1961
What is charitable purpose?
Charitable purpose is defined in Section 2(5) of the IT Act and includes:
- Relief to the poor
- Medical Relief
- Preservation of Environment
- Preservation of Monuments
- Advancement of any object of general public utility
Objects of the Trust
A charitable NPO should have specific objects. For the organization to be accepted as a charitable organization for the purpose of tax exemption it is all the more necessary that the objects should be specific so as to conform to the requirements of the Income Tax law in this regard.
Further, it is also important to note that the law provides differential treatment for charities in and outside India.
Under the Income Tax Act, exemption which is granted is with respect to the amount applied for the purpose of the trust within India. In case income is applied for charitable purposes outside India, it shall be exempt only under the general or specific orders of the Central Board of Direct Taxes. It is note worthy that the Board can grant exemption only when the purpose of the trust tend to promote international welfare in which India is interested.
Taxability of business income of a trust
With effect from A.Y. 2009-10, a charitable entity which falls in the category of "General Public Utility" shall fall outside the purview of Charitable Organization if it carries out any activity in the nature of trade, commerce or business or business for a cess or fee or any other consideration. Irrespective of the nature of use or retention of such income if the aggregate value of such receipts is more than ₹ 10 lakh. This limit has been enhanced to ₹ 25 lakh from A.Y. 2012-13.
Accumulation of Income
Charitable trusts/institutions are allowed to accumulate or set apart the income derived from property held under the trust, provided they fulfill the condition spelt out in Section 11(2) read with rule 17 of the Income Tax Rules 1962 and Form no. 10. Accumulated Income can be kept only in modes specified in Section 11(5).
Donations in respect of which the assessee fund/trust/institution etc. does maintain records of identity indicating the name and address, or other particulars of the donor as prescribed are treated as Anonymous donation and taxed as under:
- Anonymous donations received by wholly religious institutions shall remain exempt from tax.
- The Finance Act, 2006 has introduced in the Income Tax Act Sec. 115 BBC as per which in case any trust or any other charitable organization receives any anonymous donation than the same shall be be subjected to tax as the aggregate of the following:
- The amount of income tax calculated at the rate of 30% on the aggregate amount of of anonymous donations received in excess of the higher of the following namely:-
- 5% of the total donations received by the assessee; or
- ₹ 1,00,000 and
- The amount of Income Tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of anonymous donations received.
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Modified : Jan 24, 2019