Section 12A of Income Tax Act: Benefits, Registration & Eligibility Criteria

The Income Tax Act of 1961 offers certain tax incentives to help promote philanthropic endeavours and social welfare initiatives. Section 12A is one such section that applies to charitable and religious trusts and organisations involved in social welfare activities. Under Section 12A, registered non-profit organisations such as charitable trusts, societies, religious institutions, and NGOs can qualify for tax exemptions.Once a charitable organisation is formed, it must be registered under Sec 12A of the Income Tax Act to claim the available tax benefits. Therefore, it is essential for non-profit organisations to be aware of Section 12A and all its provisions. In this article, we provide a comprehensive overview of Section 12A of the Income Tax Act, discussing eligibility, documents required, benefits, steps to register, and more in detail.

Section 12A of the Income Tax Act outlines the provisions for registration of charitable trusts, NGOs, NPOs, religious organisations, and Section 8 companies to claim tax exemptions u/s 11 and 12 of the IT Act. The tax relief incentive was introduced keeping in mind that such organisations work for the general welfare of the people and not for generating profit. However, it is important to note that the financial dealings of non-12A registered entities that perform social welfare and charitable activities are subject to regular taxation.To qualify for registration under Section 12A of the Income Tax Act, organisations must adhere to specific conditions, including ensuring that they operate solely for charitable or religious purposes, using their income for these objectives. They must also maintain a thorough record of their activities and finances.

Section 12A Eligibility Criteria

The Income Tax Act of 1961 outlines the eligibility criteria for registration under Section 12A. In a nutshell, incorporated trusts, Section 8 companies, and societies that conduct public welfare services and do not earn a profit can apply for a Section 12A registration. Here’s a detailed overview of the eligibility criteria for 12A registrations:

• An organisation seeking registration under Section 12A of the Income Tax Act must fulfil the IT Act’s definition of a charitable purpose. A charitable purpose is defined as activities focused on offering relief to the poor, providing medical relief, dispensing education, and protecting the environment. Other activities for social welfare can also qualify as a charitable purpose.
• A 12A registration will be granted only if there is no profit motive involved in these activities.
• If the organisation is involved in trade and commerce, the registration will be granted only if the trade activity revenue makes up less than 20% of the assessee’s total revenue.
• Private or family-owned trusts and charities cannot apply for registration under Section 12A of the Income Tax Act.

Trusts and organisations that meet these eligibility criteria must file Form 10A online to register under Section 12A. A digital signature or electronic verification code is essential to complete the online registration process. Also Read: Maximizing Tax Savings: Understanding Sections 80C, 80D, and 80CCD

Benefits under Section 12A of the Income Tax Act

Organisations registered under Section 12A can claim a tax exemption on their generated incomes used towards charitable or religious purposes. Registration under Section 12A of the Income Tax Act is also mandatory to receive grants from the Central and State Government. 12A registered organisations are eligible for grants and financial funding from various national and international agencies as the registration lends legitimacy to the organisation. Registered organisations also enjoy greater credibility among donors as a 12A registration signifies compliance with regulatory requirements.

Understanding what is Form 10A is crucial for organisations that wish to register under Sec 12A of the Income Tax Act and claim its benefits. Form 10A is filed by religious or charitable trusts, societies, and institutions to apply and register under Section 12A. Organisations registered under Section 12A qualify for claiming tax exemptions u/s 11 and 12. The application for registration must be made online and must include all the relevant details and documents required.

Steps to File Form 10A Online

Follow this guide to file Form 10A on the Income Tax e-portal: Step 1: Log into the Income Tax Department’s e-filing portal using your credentials. Step 2: Click on the ‘e-File’ tab. Step 3: Select the ‘ Income Tax Forms ’ option. Step 4: Click on the ‘File Income Tax Forms’ option from the drop-down menu. Step 5: Under the ‘Persons not dependent on any source of income’ tab, select Form 10A and click on the ‘File Now’ option. Step 6: Choose the relevant ‘Assessment Year’ from the drop-down menu and click ‘Continue’. Step 7: Fill in each section of the form with requisite details and attach the relevant documents. Step 8: Click on the ‘Submit’ option.

Documents Required for Registration under Section 12A

Trusts, societies, and charitable organisations need to furnish the following set of documents to successfully register under Section 12A:

• A copy of registration with the applicable body which may be the Registrar of Companies, Registrar of Public Trusts, or Registrar of Firms and Societies.
• A self-certified copy of the document that proves the establishment of the trust/society.
• Self-attested copies of documents relating to the trust or society’s annual accounts.
• Paperwork proving adoption or modification of objectives.
• PAN Card details of the trust, society, or institution.
• Existing order that grants permission to register under Sec 12A or Sec 12AA.
• A note outlining the activities of the organisation in detail.
• A self-attested copy of the rejection order, if the organisation’s application for registration under Section 12A was previously rejected.

Also Read: Section 234B & 234C: Understanding Interest and Penalties on Advance Tax and Its Calculation

The procedure to obtain 12A registration is pretty straight-forward. Here’s a comprehensive step-by-step break-down of the process:

• Step 1: Apply for 12A registration online to the jurisdictional Commissioner of the IT Department using the outlined format.
• Step 2: The Commission may direct applicants for additional documents or information.
• Step 3: Once the Commissioner is satisfied with the application, a written order will be passed registering the organisation under Sec 12A.

In case, the Commissioner is not satisfied with the application, they reserve the right to reject the application. If that happens, you will be notified of the same in writing along with the reason for rejection. You can also re-apply for 12A registration after correcting any discrepancies or providing additional documents to support your application.Generally, 12A registration proceedings take around one to three months to be completed. Moreover, according to Sec 12AA(2), all approval or rejection orders passed by the Commissioner must be conveyed within 6 months from the day the application was submitted.

Earlier, registrations granted under Section 12A of the Income Tax Act possessed a life-time validity, unless cancelled by the Principal Commissioner of Income Tax or the Commissioner of Income Tax. However, new provisions introduced by the Finance Act of 2020 have removed the perpetuity clause and introduced the concept of revalidation by replacing Section 12AA with Section 12AB.According to the amended rules, the following revalidation rules apply:

• Trusts and institutions already registered under Section 12A of the Income Tax Act have to apply for fresh registration by filing Form 10A online within three months starting from 1st April 2021. Once re-registered, a new 16-digit Unique Registration Number (URN) will be assigned to the organisation.
• The new registration granted would be valid for a period of 5 years. Applicants must submit an online request for revalidation 6 months prior to the registration expiry date every 5 years.
• A provisional registration of 3 years would be granted to new organisations registering under the amended rules. Such organisations would have to apply for regular registration under Section 12A at least 6 months before their provisional registration expires.

Apart from the mandate for revalidation, the following changes have been introduced in Section 12A of the Income Tax Act:

• Books of Accounts: According to the Finance Act of 2022, NGOs, trusts, and other welfare institutions must maintain books of accounts and other relevant documents as prescribed by income tax laws if their total income surpasses the basic exemption limit of Rs. 2.5 Lakhs.
• Audit Requirements: Apart from maintaining detailed books of accounts, charitable trusts and other such organisations also need to get their accounts audited if their income surpasses the basic exemption limit. This rule will come into effect from AY 2023-2024.
• Accumulated Fund Utilisation: Effective from FY 2022-2023, if 85% of the trust’s income does not go towards charitable ventures, the unused funds become taxable. Earlier, trusts could carry the accumulated funds and apply the same within the next 5 years.
• Payment-Basis Rule for Application of Income: Starting FY 2021-2022 onwards, trusts and other such 12A-registered institutions must pay current year expenses by 31st March. Only then such expenses will be classified as ‘Application of Income’ in the current year.

Also Read: Section 80CCF - Eligibility & Deductions Under 80CCF

To sum up, registration under Section 12A of the Income Tax Act is crucial for non-profit organisations like charitable trusts, societies, and religious organisations to claim tax benefits. Qualifying organisations that meet the eligibility criteria outlined u/s 12A can register by filing Form 10A on the e-filing portal and submitting relevant documents. Once verified by the Commissioner, 12A registered organisations can claim income tax exemptions u/s 11 and 12.Ready to make the most of your money? Start your tax planning journey now!