Voluntary Contributions received by Charity Under Income Tax
In India, charities play a significant role in providing essential services and support to various sections of society. To incentivize charitable activities, the Income Tax Act, 1961 provides for certain tax benefits for charitable institutions. One of the key aspects of income tax for charities is the treatment of voluntary contributions received by them. This article will delve into the legal provisions and principles governing voluntary contributions received by charities under income tax laws in India.
Definition of Charitable Institutions
Before we delve into the tax treatment of voluntary contributions received by charities, it is important to understand what constitutes a charitable institution under Indian law. The term "charitable purpose" is defined under Section 2(15) of the Income Tax Act, 1961, and includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest.
Additionally, the institution must be registered under the relevant provisions of the Income Tax Act to avail tax benefits. Charitable institutions are typically registered under section 12A of the Income Tax Act, which exempts income derived from property held under trust for charitable or religious purposes.
Tax Treatment of Voluntary Contributions
Under the Income Tax Act, voluntary contributions received by charitable institutions are subject to specific provisions and tax treatment. Section 11 of the Income Tax Act carves out an exemption for income derived from property held under trust for charitable or religious purposes, if such income is applied for charitable or religious purposes in India. This provision extends to voluntary contributions received by charitable institutions, as long as they are applied towards charitable activities.
Voluntary contributions are broadly defined and encompass any contribution received by a charitable institution without any obligation or compulsion. These contributions may be in the form of donations, grants, or gifts from individuals, corporates, or other entities.
Conditions for Availing Tax Exemption
In order to avail the tax exemption under Section 11, certain conditions must be fulfilled by the charitable institution. The most crucial condition is that the income derived from voluntary contributions must be applied towards charitable activities in India. Charitable activities may include providing education to underprivileged children, healthcare services, relief to the poor, environmental conservation, and other such activities falling within the ambit of "charitable purpose" as defined under the Income Tax Act.
The institution must also maintain separate books of accounts to record the income and expenditure related to charitable activities. These books of accounts must be audited and submitted to the tax authorities in the prescribed manner. Additionally, the institution is required to file its annual income tax return in accordance with the provisions of the Income Tax Act.
Tax on Accumulated Income
Another important aspect to consider in the tax treatment of voluntary contributions received by charities is the taxation of accumulated income. Section 11(2) of the Income Tax Act provides that any income of the previous year not applied to charitable or religious purposes during the previous year or accumulated or set apart for application towards charitable or religious purposes in India is subject to taxation.
However, the Act provides for certain exceptions and conditions for accumulation of income. For instance, where the accumulation does not exceed 15% of the income derived from property held under trust, it is not considered as "accumulated income" for the purposes of taxation. Additionally, the accumulated income must be applied for charitable or religious purposes within a period of 5 years from the end of the previous year in which it was first accumulated.
TDS Provisions
In line with the broader provisions of the Income Tax Act, charitable institutions are also subject to TDS (Tax Deducted at Source) provisions. Section 194J of the Income Tax Act mandates TDS on fees for professional or technical services. However, there is an exemption for charitable institutions for TDS on payments made towards professional or technical services, provided that the institution furnishes its registration certificate issued under section 12A or 12AA to the person responsible for deducting the tax.
Impact of Recent Amendments
In recent years, there have been several amendments to the tax provisions governing charitable institutions in India. The Finance Act, 2020 introduced significant changes to the taxation of charitable institutions. One of the key amendments was the removal of the tax exemption for newly established charitable institutions seeking registration under section 12A or 12AA. This means that new charitable institutions are required to pay tax on their income from the date of establishment until the grant of registration under section 12A or 12AA.
The Finance Act, 2020 also introduced a new concessional tax regime for charitable institutions, wherein they have the option to pay tax at a concessional rate of 22% (plus surcharge and cess) provided that they do not claim any exemption or deduction.
Conclusion
In conclusion, voluntary contributions received by charitable institutions play a crucial role in supporting their charitable activities. The Income Tax Act provides for specific provisions and tax benefits for charitable institutions to incentivize and promote their charitable endeavors. The tax treatment of voluntary contributions is governed by various conditions and provisions under the Act, which charitable institutions must adhere to in order to avail the tax benefits.
It is imperative for charitable institutions to stay abreast of the legal provisions and recent amendments in the tax laws to ensure compliance and proper tax planning. Seeking professional advice from tax experts and legal advisors can be instrumental in navigating the complex tax landscape and maximizing the tax benefits available to charitable institutions. By adhering to the legal principles and conditions prescribed under the Income Tax Act, charitable institutions can continue their important work in contributing to the welfare of society while also availing tax benefits in a compliant manner.
