Registrations and Compliances of Charitable Institutions under Income Tax Act, 1961

There is an earnest desire among many members of the public to do charity, welfare and social good. This leads to flow of money without consideration from one individual to another or from one entity to another.
Such flow of money is termed as donation in common as well as legal parlance. Unlike in commercial transactions, in case of donations, the decision makers, or person carrying out charitable activities or the
beneficiaries of such activities are different from the person who are extending the money (‘Donors’). Such set ups may, at times, be an opportunity for anti-social elements to negate the welfare of the needy or to carry out their malicious activities in disguise. In order to tackle these nuisances, charitable institutions have to obtain
various registrations and comply with multiple statutory filings, reporting and audits. This article looks into these compliances within the ambit of the Income Tax Act, 1961(‘Act’).

Types of Charitable Institutions

Before jumping to the applicable provisions under the Act for charitable institutions, different types of charitable institutions can be looked at. Most of us know these institutions as Non-Government Organisation (‘NGO’) or Non-Profit Organisation (‘NPO’). However, from legal point of view, these institutions are incorporated as a separate legal entity either as public trusts or societies or companies.

Registrations under the Act:

Benefits of above registrations under the Act

On registration under the Act, trusts or institutions get recognized as charitable or religious trust and shall get special benefits and treatment for taxation. The most important ones are:-

Annual filing and statutory compliance:

Over the past few years the charitable trusts and institutions have been subjected to increasing level of statutory obligations in the form of new compliances and reporting requirements. Other than the compliance of the charity commissioners, the Act also mandates compulsory filing of returns, adherence with the Tax
Deducted at Source (‘TDS’) rules, tax audits, prohibition on acceptance of donations in cash exceeding Rs. 2,000/-, no tax exemption for anonymous donations to charitable institutions and renewal in 5 years of its registrations among other things. To add to the above list, beginning from Financial Year 2021-2022, donations have been categorized as a Specified Financial Transaction (‘SFT’). Accordingly, registered trusts and institutions have to furnish statement of donations received annually, based on which the tax deduction shall be available to the donors. These details of donations have to be furnished in Form No. 10BD annually, on or before 31st May of the subsequent financial year. Details of donation include PAN/Aadhaar of the donor, passport number if PAN/Aadhaar is unavailable, amount of donation, mode of payment and date of donation.

In view of these increasing statutory obligations, it has become imperative for charitable trusts to streamline its activities and Also, these increased regularizations have led to substantial increase in the overall cost of compliance for charitable trusts. Hence charitable institutions should be incorporated only in case one is sure of continuous and consistent charitable activities year after year.

(This article represents the views of the authors only and does not intent
to give any kind of legal opinion on any matter)
Authors:
Chetan Mody
Consultant | Email: chetan.mody@masd.co.in
Soham Dongre
Associate Consultant | Email: soham.dongre@masd.co.in