Under subsection 501(c) of the Internal Revenue Code, organizations that fall under the definition of public charities are eligible to receive tax exemption from the payment of federal income tax. These tax-exempt entities are further exempt from similar state and local taxes.
Simply put, charitable contributions made by an individual or business to an organization that has been granted 501(c)(3) tax-exempt status are tax deductible.
Let’s learn more about non-profit organizations’ tax-exemption eligibility and related laws in India.
Which Tax Exemption Laws of the Internal Revenue Code of India are Applicable to Non-Profit Organizations?
The tax laws applicable to not-for-profit organizations (NPOs) in India are identical to those in other Commonwealth countries. Certain non-profit organizations that engage in specific activities are exempt from federal income tax, with the exception that income generated from unrelated business activities is taxable under certain conditions.
- While we are aware that India imposes Goods & Services Tax (GST) on the sales of certain goods and services, an organization registered under Section 12AA of the Income Tax Act (1961) is exempt from the GST if it engages in charitable activities. These charitable activities include public health services, promoting public awareness of preventive health, family planning or prevention of HIV infection, and advancing religion, spirituality or yoga.
- Previously, NPOs were required to pay service tax with a threshold exemption limit of INR 1 million on all taxable services they provided. Under GST, for the intra-state supply of commodities, the threshold exemption limit is INR 4 million, while for the intra-state provision of services, it is INR 2 million.
- Last but not least, NPOs engaged in relief work and the distribution of aid to the poor receive 100% exemption from Indian customs duties on the importation of goods like food, medicine, clothing, and blankets.
What it means to become Tax-Exempt and why is it important?
Once incorporated, the first thing a non-profit organization must do is become tax-exempt. A non-profit organization’s ability to operate tax-exempt is one of its main benefits. This means, saving a lot of money that can be further used towards the fulfilment of the organization’s goals.
What does being tax-exempt exactly mean?
According to federal tax law, a non-profit organization that generates a profit and has earnings that exceed its expenses is said to be “tax-exempt,” meaning that it is not required to pay taxes on that revenue.
Tax exemption enables you to take those tax funds and put them back into advancing your objectives. The idea is that non-profit entities carry out activities that we believe are beneficial to the economy. By enabling you to take those funds and reinvest them in your organization, the government hopes to promote more of that.
Here are a few things that will help you achieve this:
- To benefit from this tax exemption, you must first file Form 1023. In order to keep your tax-exempt status with the federal government, there are a few annual obligations after filing Form 1023 you must fulfil.
- One of the most useful ways to keep that tax exemption is by filing Form 990. You must submit the paperwork each year. It’s quite essential, for, in addition to losing the tax exemption, you will also lose a number of additional advantages in Form 990 is not filed on time.
- Being a tax-exempt organization has many added advantages, like state tax exemptions and property tax exemptions.
Which organizations/entities are not eligible for a Tax Exemption?
Private religious trusts and charitable trusts or organizations founded after April 1, 1962, formed for the benefit of any specific religious community or caste, are ineligible for a tax exemption. An exception to this rule is a trust or institution created for the benefit of “Scheduled Castes, backward classes, Scheduled Tribes, or women and children.” A trust or organization of this type is not ineligible, and its revenue is eligible to receive a tax exemption.
Conclusion:
It is insightful to learn that in order to be tax-exempt, an organization must run solely for charity, academic, spiritual or public safety objectives, and/or, collect money and give it to entities or people that have been officially registered as charities. In compliance with our various tax-exemption laws, a non-profit organization must keep up with the paperwork annually and file Form 1023 and Form 990 to keep enjoying the perks of exemption from federal income tax.
