Introduction: The Truth About Non-Profit Taxation in India
Let’s start with a hard truth that I’ve had to break to countless passionate social entrepreneurs over the last two decades: Being a “non-profit” does not make you tax-exempt.
It sounds counterintuitive, doesn’t it? You register a Trust, Society, or Section 8 Company to help the underprivileged, not to make money. Yet, in the eyes of the Income Tax Department, until you secure specific registrations, your NGO is treated essentially as an Association of Persons (AOP). This means any surplus income you generate—whether from donations, interest, or grants—could be taxed at the maximum marginal rate (often 30% plus cess).
Imagine raising ₹10 Lakhs for a cause, only to hand over ₹3 Lakhs to the government because of a paperwork oversight. That is a tragedy I want to help you avoid.
Mastering ngo tax exemption India is about more than just saving money. It is about legitimacy. It is about signaling to donors, strictly regulated CSR committees, and the government that you are a credible, transparent, and compliant organization. In this guide, I’m going to walk you through the entire landscape—from the new Section 12AB regime to the critical Form 10BD filings—so you can focus on your mission without looking over your shoulder.
The Core Pillars: Understanding Section 12AB and 80G
When we talk about tax exemption, we are really talking about two distinct but related sections of the Income Tax Act, 1961. Think of them as the shield and the magnet.
1. Section 12AB (The Shield)
Formerly known as Section 12A, this is your shield against income tax. If you hold a valid 12AB registration, the income your NGO earns is exempt from tax, provided you follow the rules of application (spending the money on your cause). Without this, your income is taxable.
2. Section 80G (The Magnet)
This is your fundraising magnet. It doesn’t exempt your income directly; it incentivizes donors to give to you. A donor contributing to an 80G-registered NGO can deduct 50% of their donation amount from their own taxable income.
The New Regime: From Lifetime to 5-Year Renewals
If you have been running an NGO for years, you might remember a time when 12A registration was a one-time affair. You got it once, and it was valid for a lifetime unless cancelled. That era is over.
The Finance Act 2020 completely overhauled the system. Here is the new reality for ngo tax exemption India:
- The 5-Year Rule: All registrations are now valid for a period of 5 years only. You must apply for renewal at least 6 months before the expiry.
- Provisional Registration: New NGOs (those not yet active) are granted a “Provisional Registration” valid for 3 years. This allows you to start operations with tax benefits immediately.
- Conversion to Regular: This is where people get stuck. You must apply to convert your Provisional registration to a Regular (Permanent) one at least 6 months before the expiry of the provisional period OR within 6 months of commencing activities, whichever is earlier.
Eligibility Criteria: Who Actually Qualifies?
Not every organization with a good heart qualifies for ngo tax exemption India. The Income Tax Department is extremely strict about the definition of “Charitable Purpose” under Section 2(15). To qualify, your NGO must fall into one of these buckets:
- Relief of the poor (e.g., food banks, homeless shelters)
- Education (formal schooling or vocational training)
- Yoga
- Medical relief
- Preservation of environment (including watersheds, forests, and wildlife)
- Preservation of monuments or places of artistic/historic interest
- Advancement of any other object of general public utility
The “Commercial Activity” Trap
This is a nuanced area. If your objective is “Relief of the poor,” “Education,” or “Medical relief,” you have more leeway. However, if you fall under “Advancement of any other object of general public utility,” the government watches you like a hawk.
If your NGO engages in trade, commerce, or business (even if the profits are used for charity), and the receipts from this activity exceed 20% of your total receipts, you lose your exemption for that year. Your entire income becomes taxable.
The 85% Spending Rule: Use It or Lose It
Here is a concept that confuses many new trustees. Having a 12AB certificate doesn’t mean your income is automatically tax-free. It means you are eligible for exemption if you follow the rules. The biggest rule is the 85% Application of Income.
To claim exemption, an NGO must spend at least 85% of its total income on its charitable objectives within India during the financial year.
Example:
- Total Income: ₹10,00,000
- Mandatory Spending (85%): ₹8,50,000
- Allowed Surplus (15%): ₹1,50,000
If you spend only ₹6,00,000, the shortfall of ₹2,50,000 becomes taxable income unless you file Form 10 to accumulate funds for a specific future project (valid for up to 5 years). This requires a board resolution and specific declaration.
Step-by-Step Guide: How to Apply for NGO Tax Exemption India
The entire process is now digital, hosted on the Income Tax E-Filing portal. Here is the workflow I recommend to ensure a smooth approval.
Step 1: Preparation of Documents
Before you even log in, ensure you have these documents ready. A single missing page can lead to a query or rejection.
Legal Instruments
Self-certified copy of Trust Deed, Society Bylaws, or MOA/AOA. Ensure the “Dissolution Clause” and “Irrevocability Clause” are present.
Registration Proof
Certificate from the Charity Commissioner, Registrar of Societies, or RoC. If you are a Section 8 company, include your COI.
Financial History
Audited accounts for the last 3 years. If you are a new NGO, a provisional balance sheet is often accepted but not always required.
Activity Report
This is crucial. Write a detailed note explaining what you have actually DONE. Include photos, brochures, and beneficiary details.
Step 2: Filing Form 10A or 10AB
Log in to the income tax portal. Navigate to e-File > Income Tax Forms > File Income Tax Forms.
- Use Form 10A if you are applying for Provisional Registration (New NGO).
- Use Form 10AB if you are converting from Provisional to Regular, or renewing an existing 5-year registration.
Step 3: Verification and DSC
The form must be verified using a Digital Signature Certificate (DSC) of a trustee or director. Electronic Verification Code (EVC) is allowed in some cases, but I strongly recommend getting a DSC for the principal officer to avoid authentication issues.
The Game Changer: Form 10BD (Statement of Donations)
In the past, an NGO would issue a paper receipt, and the donor would claim a deduction. This system was rife with fake donation scams. To curb this, the government introduced Form 10BD.
By May 31st of every year, your NGO must file Form 10BD, listing every single donor who claimed 80G benefits, along with their ID proof (PAN/Aadhar). Once filed, the portal generates a Certificate of Donation (Form 10BE), which you must give to the donor.
Why is this critical? If you don’t file Form 10BD, the donation will not appear in the donor’s Annual Information Statement (AIS) or pre-filled tax return. The donor will likely be denied the tax deduction. If that happens, you can be sure they will never donate to you again. Furthermore, there is a penalty of ₹200 per day for late filing.
Common Compliance Pitfalls to Avoid
I have audited enough NGOs to know that good intentions often lead to bad compliance. Here are the specific traps regarding ngo tax exemption India that you must avoid:
1. Anonymous Donations (Section 115BBC)
If you receive anonymous donations (where you don’t have the name and address of the donor) exceeding 5% of your total donations or ₹1 Lakh (whichever is higher), that amount is taxed at a flat 30%. Always maintain a donor register.
2. Cash Donation Limits
You cannot accept a cash donation exceeding ₹2,000 if the donor wants an 80G deduction. For the NGO itself, accepting cash deposits over ₹2 Lakhs can trigger penalties under Section 269ST. Stick to banking channels—it builds trust and audit trails.
3. Benefit to Interested Persons (Section 13)
This is the fastest way to lose your license. You cannot pay any unreasonable salary, rent, or fees to trustees or their relatives. If the Income Tax Officer (ITO) feels a payment to a trustee was excessive or not at arm’s length, the exemption is denied.
Conclusion: Building a Sustainable Future
Securing ngo tax exemption India is not a one-time administrative hurdle; it is an ongoing commitment to transparency. It requires you to think like a CFO while acting with the heart of a social worker. By securing your 12AB and 80G registrations, adhering to the 85% spending rule, and timely filing your Form 10BD, you are doing more than just satisfying the taxman.
You are building an institution that can outlast its founders. You are creating a structure that corporate India can trust with their CSR funds. You are ensuring that the maximum possible amount of every rupee donated goes towards the cause, not the coffers of the state. If you are unsure about which legal structure supports these exemptions best, I recommend reviewing the differences in our guide on Section 8 Company vs Trust vs Society structures.
Don’t let compliance scare you. Embrace it as the foundation of your impact. If you need a checklist to ensure your annual returns are ready, check our ITR documents checklist and get your paperwork in order today.
FAQs
For provisional registration (Form 10A), the process is automated and can often be approved within a few weeks to a month. However, for regular registration (Form 10AB), the Commissioner may take up to 6 months to review documents and pass the order.
Yes, absolutely. In fact, it is recommended to file Form 10A for both sections simultaneously so that your fundraising and income exemption are sorted at the same time.
Missing the May 31st deadline attracts a late fee of ₹200 per day under Section 234G. Additionally, the Assessing Officer can levy a penalty ranging from ₹10,000 to ₹1 Lakh. More importantly, your donors will be upset when they don’t see the tax credit.
No, FCRA is separate. You need 12AB/80G for domestic tax exemption. You need FCRA only if you intend to receive foreign contributions. However, having 12AB is a prerequisite for applying for FCRA.
Generally, no. A trust set up for the benefit of specific individuals or family members is a Private Trust. Only Public Charitable Trusts established for the benefit of the general public are eligible for 12AB and 80G exemptions.
