Income Tax

All about Section 12 of Income Tax Act, 1961

All about Section 12 of Income Tax Act, 1961

Section 12 of the Income-tax Act talks about voluntary donations received by a trust for charitable or religious purposes will be income derived from the property held under the trust wholly for the purposes mentioned and can claim exemption following the conditions mentioned in section 11 of the Act.

What Is The Need To Register A Trust Under Section 12 Of Income Tax Act?

For several reasons, trust registration under Section 12 of the Income Tax Act is required:

  1. A Trust Deed that has been registered is now an official document enforceable under the law. It gives the trust a solid legal base upon which to stand and function.
  2. The transfer of possession of trust property to the trustee is made effective and legally binding by registration of the trust deed.
  3. It aids in establishing control and ownership of the trust’s assets.
  4. The likelihood of legal challenges and conflicts decreases when the trustee receives the trust property through a registered deed.
  5. Making the transfer more credible and specific makes it more difficult for third parties to contest the trust’s ownership.
  6. The trust must first be registered to obtain a tax exemption under Section 11 of the Income Tax Act. The trust must be registered, and the Act’s requirements must be met to be eligible for tax benefits on income from the trust property.
  7. Contributors must have a registered trust deed to qualify for tax benefits under Section 80G of the Income Tax Act. If a registered trust satisfies the requirements, donations paid to that trust may be deducted in accordance with the Act.

Types of registration of a trust made under Section 12 of the Income Tax Act

Types of registration

How To Register A Trust Under Section 12A (1) In Relation To Section 12 Of the Income Tax Act?

Section 12AA talks about the registration of a trust made under Section 12 of the Income Tax Regulation

The Principal Commissioner has to take the following steps to register a trust created under Section 12 of the Income Tax Act:

  • To call for the documents and information to satisfy himself regarding the purpose of the trust and to make inquiries, he thinks necessary;
  • After the satisfaction and genuineness of the purposes of the trust, he may:
    • Pass an order to register the said trust in writing;
    • Pass an order to refuse to register the said trust in writing;
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A copy of such an order must be given to the applicant, and a reasonable opportunity must be given to the applicant in case of refusal of registration.

How An Income From Section 12 Of the Income Tax Act Be Exempted?

The following conditions are to be satisfied to claim an exemption under section 11:

  • The trust must be formed for lawful & charitable or religious purposes.
  • The income obtained from the property must be held under a trust or other legal obligation.
  • The property must be held for charitable or religious purposes. Where a charitable trust is created on or after April 1, 1962, the further conditions must be satisfied to claim exemption:
    • The trust should not be created for the benefit of any particular religious community or caste;
    • The income either directly or indirectly benefiting any specified persons; and
    • The property should be held wholly for charitable purposes.
  • The exemption can be given to such income applied for charitable or religious purposes in India.

Application of Income by Trusts Made Under Section 12 of Income Tax Guidelines

Application of income means spending of income by the assessee, and such amount must be included in the total income. The applied income is taxable in the possession of the assessee.

Application of Income is mentioned under Section 11 (1), and it includes:

  • Repayment of loans taken for the purposes specified for the trust is treated as an application of income.
  • Consumption of the income to meet the previous year’s expense is an application of income.
  • Application of income is also the capital gain derived by a trust.
  • Donation given to one charitable or religious trust to another is an application of income for donor trust.
  • And many more can be treated as an application of income under the section.

Accumulation of Income by Trusts Made Under Section 12 of Income Tax Regulations

Accumulated income is the net income retained by the corporation or the company over time, not distributed as dividends to the shareholders. The accumulated income in respect of trusts established under section 12 of the income tax act is the income accumulated for charitable or religious purposes.

Section 11(2) of the income tax act states that:

  • Accumulation of 85% of the income
    • Under section 11(2), 85% of the income is not applied for the trust’s purposes so that the trusts may accumulate the income wholly or partly for future application.
    • The trust must inform the Assessing officer to accumulate the income electronically in Form 10.
    • The income accumulated by the trust must be used for specified purposes; otherwise, it will become taxable.
  • Accumulation of income above 15% of the income
    • The assessee can accumulate 15% of the income if the conditions are satisfied. If the assessee wants to accumulate more than 15% of the income, it must be used for the purposes specified for the trusts established under section 12 of the income tax act during the previous year.
    • The exemption under section 11(2) is allowed if the following conditions are satisfied:
      • Furnishing the statement in Form No. 10 electronically, either through a digital signature or electronic verification code, to the AO.
      • The accumulated income must be invested or deposited in the form prescribed under Section 11(5).
      • The statement stating the object under Form 10 must be submitted before the due date under section 139 (1) of the Act.
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Section 11(3) of the income tax act states that:

If the accumulated income above 15% of the net income is not deposited or invested in the manner prescribed under section 11(5), the income ceases to accumulate income.

Forfeiture of Exemptions of the Trusts Made Under Section 12 of the Income Tax Act

Section 13 of the income tax act talks regarding the forfeiture of exemption of incomes of the trusts established under Section 12 of the Income tax act1.

The following incomes by the trusts established under section 12 of the income tax act are not applicable for exemption under section 13 is:

  • Section 13 (1) (a) is not applicable to the incomes made by the private trusts that satisfied the element of public benefit. Whereas, if the public does not benefit from such trust, then no exemption under section 11 or section 12 of the income tax guideline will be given.
  • If a charitable or religious trust was established after 01-04-1962 to benefit a specific community or caste, then the exemption under section 11 or section 12 of income tax regulations is not available. However, the exemption is available for such trusts if established before 01-04-1962.
  • If a charitable or religious trust established after 01-04-1962 benefiting a person specified under section 13 (3), then the exemption under section 11 or section 12 of income tax regulations is not available. However, the exemption is not forfeited for such trusts if established before 01-04-1962 if it complies with the mandatory provisions of the institution’s rules.
  • In case the funds are not invested in the manner prescribed in Section 11 (5), it is not applicable for exemption under Section 11 or Section 12 of the income tax act.
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Conclusion

Section 12 talks about a donation a trust receives for charitable or religious purposes will be income derived from the property held under the trust wholly for the purposes mentioned. They can claim exemption following the Act’s conditions mentioned in section 11.

FAQs

What is income tax section 12 (a) (b)?

The Income Tax Act of 1961’s Section 12A (1) (b) deals with the registration of trusts and organizations created for charitable purposes. Simply put, this section describes the requirements for registering organizations that work to benefit society and pursue charity goals.

What are sections 12 A & 80 G of the Income Tax Act?

Donors benefit from registering under Section 80G, while NGOs can register under Section 12A to receive tax exemption for their income under Section 80A of the Income Tax Act.

What is the 12A exemption?

Under Section 12A of the Income Tax Act of 1961, non-profit organizations like charitable trusts, welfare societies, NGOs, religious institutions, and comparable entities are eligible for tax deductions.

What is Section 12 of the income tax?

Income received by a trust or institution established exclusively for charity or religious purposes in the form of voluntary contributions is subject to tax exemption.

Can I apply for 80G without 12A?

An NGO needs to receive Section 12A certification to register under Section 80G.

What is the difference between 12A and 80G?

Individuals who donate to an NGO can benefit from registration under Section 80G of the Revenue Tax Act. In contrast, Section 12A registration enables an NGO to get a tax exemption for its organizational revenue.

Read our article:Read Details About Section 13 of the Income Tax Act, 1961

References

  1. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx

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