Section 12A registration is a one-time registration provided by the Income Tax Department to trusts and other non-profit organizations. Its purpose is to exempt these organizations from paying income tax. Typically, organizations apply for 12A registration soon after their incorporation. Trusts, NGOs, and Section 8 companies that have obtained 12A registration are exempted from income tax on their surplus income. This registration facility is available to all non-profit entities, making it essential for trusts, NGOs, and other not-for-profit organizations to understand Section 12A of the Income Tax Act and its registration procedure.
Eligibility for 12A Registration:
- To qualify for registration under Section 12A, the organization must meet the definition of charitable purpose as outlined in the Income Tax Act. Charitable purposes include providing relief to the poor, education, medical relief, and activities aimed at preserving the environment. Engaging in any other objective of public utility can also qualify as a charitable purpose.
- The primary criterion for qualification is the absence of a profit motive in the organization’s activities. If there is no profit motive, registration can be granted.
- In cases where the organization carries out trade or commerce activities, the benefits provided under Section 12A are limited. Registration is granted only if the receipts from trade activities are less than twenty percent of the total receipts of the organization.
- It’s important to note that 12A registration is not applicable to private or family trusts. The activities of the organization should genuinely benefit the public in order to be eligible for registration under Section 12A.
Section 12A Registration offers several advantages, which include:
- Income Application: Funds utilized for charitable or religious purposes are considered as the application of income. This means that expenses incurred for such purposes can be deducted when calculating the taxable income of the not-for-profit organization.
- Income Tax Exemption: The income received by the organization is exempt from income tax. This enables the organization to utilize its income for charitable or religious activities without being liable for tax payments.
- Accumulation of Income: Registered organizations have the option to accumulate or set aside a portion of their income for future use. However, the accumulated income should not exceed 15% of the amount applied towards charitable or other non-commercial purposes.
- Exclusion from Total Income: The accumulated income, which is considered as the income application, is not included in the organization’s total income. This provides tax benefits and allows the organization to allocate funds for specific purposes over time.
- Eligibility for Grants: NGOs registered under Section 12A become eligible to receive funds and grants from both domestic and international sources. Various agencies and organizations specifically provide grants to NGOs with this registration, supporting their charitable endeavors.
These benefits encourage not-for-profit organizations to obtain Section 12A Registration as it offers tax exemptions, flexibility in managing funds, and access to grants, facilitating their charitable or religious initiatives.
Documents required for trust registration:
- Copy of the instrument used to create the trust or establish the institution.
- Document evidencing the creation of the trust or establishment of the institution, if not created through a registered instrument.
- Copy of the registration with the applicable body (Registrar of Companies, Registrar of Firms and Societies, or Registrar of Public Trusts).
- Documents providing evidence of adoption or modification of the objectives of the entity.
- Annual financial statements for the past three financial years.
- Note on the activities conducted by the entity.
- Copy of the existing order granting registration, if applicable.
- Copy of the order of rejection, if the previous application for registration was rejected.
Registration process for trust:
- Submit the application in the required format online.
- Provide any additional information or documents requested by the Commissioner to satisfy the Income Tax Department about the genuineness of the activities undertaken by the trust.
- If satisfied, the Commissioner will pass a written order stating that the assessee is eligible for registration under the section.
- The written order is forwarded to the assessee.
- Upon receipt of the order, the assessee can obtain the registration.
- If the Commissioner is not satisfied, the application may be rejected, and the assessee should be informed in writing of the reason for the rejection.
The key deliverables for Section 12A/12AA registration are:
a. Fill out and submit the application form to the Income Tax Department.
b. Receive the Section 12A/12AA Registration Certificate upon approval.