Section 12A of Income Tax Act

What is Section 12A of the Income Tax Act?

Section 12A of the Income Tax Act offers a framework for the registration of charitable and religious organisations, which qualifies them for income tax exemptions. The section was specifically designed to support entities working towards the public good, such as NGOs, trusts, societies, Section 8 companies, and religious institutions. It ensures that these entities are not taxed on income used for their charitable or religious purposes, enabling them to redirect their funds towards furthering their missions.
 

Eligibility Criteria for Section 12A Registration

Not every charitable organisation is eligible for registration under Section 12A. There are specific conditions that need to be met before an entity can qualify for this tax exemption. These conditions include:

Charitable Purpose: The organisation must operate exclusively for charitable purposes. Charitable purposes include relief of the poor, advancement of education, medical relief, and environmental protection. Activities undertaken must not be focused on making a profit.

No Profit Motive: If an organisation is involved in any commercial activities, the income generated must not exceed 20% of its total revenue. Otherwise, it may lose its eligibility for Section 12A registration.

Public Welfare Activities: The organisation must be focused on public welfare rather than private or family interests. Family or private trusts are not eligible for registration under Section 12A.

Non-Political: The organisation should not be involved in any political activities, as the registration under Section 12A is meant for promoting social causes.

The Benefits of Section 12A Registration

The primary advantage of registering under Section 12A is the exemption from income tax on funds used for charitable or religious purposes. Here are the key benefits:

Tax Exemption on Income: Once an organisation is registered under Section 12A, it is exempt from paying tax on income that is directly applied for charitable or religious purposes. This helps these organisations allocate more resources towards their cause, rather than spending funds on tax liabilities.

Eligibility for Government Grants: Government funding or grants are typically available only to organisations that have registered under Section 12A. This makes it easier for non-profits to obtain financial support from central and state governments.

Credibility and Trust: Registration under Section 12A increases the credibility of an organisation. It signals to donors, investors, and stakeholders that the organisation is operating transparently and within legal frameworks. This can enhance trust and encourage more donations.

Donation Benefits for Donors: Donors to organisations registered under Section 12A can also avail themselves of tax deductions under Section 80G of the Income Tax Act. This makes contributing to such organisations more attractive from a tax perspective.

The Process of Obtaining Section 12A Registration

The process of obtaining Section 12A registration is relatively straightforward but requires careful attention to detail. Here’s a step-by-step guide:

Online Application: The first step is to apply online through the Income Tax e-filing portal. The organisation must file Form 10A, which is the application form for registering under Section 12A.

Submission of Documents: Along with the Form 10A, organisations need to submit relevant documents such as the PAN card of the organisation, registration details with the applicable authority (e.g., Registrar of Companies, Registrar of Public Trusts), and a description of the activities being undertaken.

Approval from the Commissioner: After the application is submitted, it will be reviewed by the Income Tax Commissioner. If the Commissioner is satisfied with the submission, the organisation will be granted the Section 12A registration.

Communication of the Decision: The Commissioner will communicate the decision within six months of receiving the application. If the registration is approved, the organisation will be issued a certificate under Section 12A, confirming its tax-exempt status.

Key Documents Required for Section 12A Registration

The following documents are necessary for the successful processing of a Section 12A registration:

PAN Card of the Organisation: A PAN card is essential for all entities seeking tax exemptions.

Proof of Registration: Documents proving that the organisation is legally registered, such as a certificate of incorporation, trust deed, or memorandum of association.

Annual Accounts: Self-attested copies of the organisation’s annual accounts and financial statements.

Details of Activities: A document detailing the charitable or religious activities carried out by the organisation.

Tax Compliance: Copies of any tax filings or approvals from the government that validate the organisation’s charitable status.

Rejection Documents: If applicable, provide documents related to any previous rejection of registration under Section 12A.

Recent Amendments to Section 12A

The Finance Act of 2020 introduced significant changes to Section 12A, aimed at streamlining the registration process and ensuring better compliance. The key amendments include:

Revalidation of Registration: Previously, Section 12A registration was granted for an indefinite period. However, under the new rules, registration is valid for five years. Organisations must apply for revalidation at least six months before their registration expires.

Audit Requirements: If the total income of a registered organisation exceeds Rs. 2.5 lakh, it must maintain books of accounts as per prescribed rules. Additionally, such organisations are required to get their accounts audited.

Use of Income: The rules mandate that at least 85% of an organisation’s income must be applied to charitable purposes in the same financial year. If not, the unutilised income will be subject to taxation.

Provisional Registration: New organisations now receive provisional registration for three years, after which they must apply for full registration under Section 12A.

New Revalidation Rules under Section 12A

Section 12A lays down the registration framework for trusts/institutions that want to claim income tax exemptions. Over the past few years, the compliance structure has moved from “one-time registration” to a more structured, renewal-style regime - with revalidation and periodic checks built in.

Under the newer rules, existing trusts/institutions that were already registered earlier were required to revalidate their registration within the prescribed timeline by applying again through the designated forms. The idea behind revalidation is to:

• create a centralised, updated database of registered entities,
• ensure the details and activities remain aligned with charitable objectives, and
• bring consistency in approvals, validity periods, and monitoring.

A key shift is that registrations are now typically granted with a defined validity period (rather than being open-ended), and entities are expected to apply for renewal/revalidation within the due time to continue claiming benefits.

In practical terms, if revalidation/renewal is missed:

• it can affect the entity’s ability to claim exemption for the relevant period, and
• it may require fresh registration procedures (with added compliance steps).

Types of Registration Using Form 10A

Form 10A is the application form used by trusts/institutions for certain types of registrations and approvals under the updated regime. Broadly, it is used in cases such as:

1) Provisional registration

Entities that are newly set up (or not yet fully operational) often apply for provisional registration using Form 10A. This allows them to begin the process of claiming benefits while they build track record and operational activity, subject to future conversion into regular registration.

2) Revalidation / migration of existing registrations

Trusts and institutions that had existing approvals under the older system were required to apply using Form 10A to revalidate or migrate their registration into the new validity-based framework (as per prescribed rules and timelines).

3) Registration for certain categories of charitable institutions

Depending on the entity’s nature (trust, society, section 8 company, etc.) and the approval being sought, Form 10A is used to submit:

• entity details
• governing documents (trust deed/MOA)
• charitable objects and activities
• key persons’ details and compliance declarations

In short, Form 10A is typically used for entry-level registration (provisional) and transition/revalidation cases, while other forms may be used for subsequent conversion/renewal depending on the stage and type of approval.

Conclusion

Section 12A of the Income Tax Act is a crucial provision for organisations involved in charitable and religious activities. By registering under this section, organisations not only gain significant tax exemptions but also enhance their credibility and access to government grants. However, it is important to meet the eligibility criteria and adhere to the procedural requirements to ensure smooth registration. With recent amendments, the process has become more structured, providing a framework for continued compliance. Organisations looking to maximise their resources and contribute to societal welfare must consider obtaining Section 12A registration for long-term sustainability and growth.