Simplified Tax Exemptions for Charitable Trusts – Union Budget | 2024-25 Amendments

The exemption regimes under Section 10(23C) and Section 12A of the Income-tax Act, 1961, pertaining to tax exemptions for certain nonprofit organisations, including trusts, educational institutions, and medical institutions in India. Each section outlines specific conditions under which these entities can be exempted from paying taxes on their income. The Union Budget 2024-2025, presented by Finance Minister Smt Nirmala Sitharaman on July 23, 2024, introduced significant changes aimed at simplifying tax regimes and enhancing transparency for charitable organisations. A notable shift is the merging of the tax exemption frameworks under Section 10(23C) and Section 12A of the Income-tax Act, 1961. This move is designed to streamline procedures, reduce redundancies, and provide greater tax certainty for taxpayers.

Table of Contents

1. Introduction
2. Summary of the Amendments and Key Issues
3. Overview of Current Provisions under Section 10(23C)
4. Process of Shifting from First Regime to Second Regime
5. Conversion of Provisional Approval under Section 10(23C) to Regular Registration under Section 12AB and Related Issues
6. Additional Compliances Due to the Transition from Section 10(23C) to Section 11
7. Enabling Window for Solely Educational Institutions to Shift from Section 10(23C) to Section 11
8. Reverting from a Solely Educational Institution to a Charitable Organisation

1. Introduction

Hon’ble Finance Minister Smt Nirmala Sitharaman presented the Union Budget 2024-2025 on July 23, 2024. In her budget speech, she emphasised the government’s continued efforts to simplify taxes, enhance taxpayer services, provide tax certainty, and reduce litigation, all while increasing revenue to fund development and welfare schemes. A comprehensive review of the Income-tax Act, 1961, was also announced. The aim is to make the Act concise, clear, and easy to understand, thereby reducing disputes and litigation and providing greater tax certainty for taxpayers. This review is proposed to be completed within six months.

It was also announced that the Finance (No. 2) Bill 2024 marks the beginning of efforts to simplify the tax regime for charitable organisations. Among several amendments, the most significant change is merging the two parallel tax exemption regimes: Section 10(23C) and Section 12A. This change involves transitioning existing organisations approved under Section 10(23C) to the Section 12A regime.

Over the past years, several amendments have been made that effectively eliminated the additional privileges previously enjoyed by organisations under Section 10(23C). As a result, both regimes now offer similar benefits, and the procedures and conditions have been largely aligned. Therefore, maintaining both regimes has become redundant. However, it is crucial to understand the procedural and constitutional implications for entities shifting from the Section 10(23C) regime to the Section 11/12 exemption regime.

2. Summary of the Amendments and Key Issues

• No new applications seeking approval or provisional approval under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) can be made or considered on or after 01-10-2024. It is important to note that these four clauses are the only ones requiring approval from the Principal Commissioner of Income Tax (PCIT) or Commissioner of Income Tax (CIT). The amendments apply exclusively to these clauses and do not affect sub-clauses (iiiab), (iiiac), (iiiad), or (iiiae) of Section 10(23C), which do not require such approval.
• Applications filed under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) before 01-10-2024, and still pending will be processed and considered under Section 10(23C) regime. In other words, new registrations under Section 10(23C) with a validity of five years can be issued until 31-03-2025. Therefore, the sunset timeline for all organisations approved under these sub-clauses will be the assessment year 2029-30. The government should have shifted to the assessment under the Section 12A regime from an earlier assessment year.
• Approved trusts, funds, or institutions will continue to avail exemption benefits under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) until their current approval expires. Afterwards, they will be eligible to apply for renewal of registration under the Section 12A regime. Amendments have been proposed in Section 12A to facilitate this transition.
• Certain eligible modes of investment under the Section 10(23C) regime (e., those specified in clause (b) of the third proviso to Section 10(23C)) will be protected under the Section 12A regime through proposed amendments in Section 13. This means that certain investments, previously allowed only under Section 10(23C), will now be permissible for all organisations registered under Section 12A as well.

3. Overview of Current Provisions under Section 10(23C)

Section 10 of the Income-tax Act provides an exclusive list of income that does not form part of the total income of the assessee. The incomes enumerated in the section are excluded from the assessee’s total income computed under the five heads of income. Clause (23C) of Section 10 exempts income received by any person on behalf of certain specified funds, universities, educational institutions, and other similar entities.

The specified institutions eligible for exemption under Section 10(23C) are divided into two categories: First is the Non-approval Category: Institutions in this category can claim exemptions without needing approval from the PCIT/CIT. Second is the Approval Category: Institutions in this category can claim exemptions only after obtaining approval from the PCIT/CIT.

3.1 Institutions not subject to approval from PCIT/CIT

• Any university or other educational institution which is wholly or substantially financed by the Government. [Section 10(23C)(iiiab)]
• Any hospital or other institution which is wholly or substantially financed by the Government. [Section 10(23C)(iiiac)]
• Any University or other educational institution if the aggregate annual receipts do not exceed Rs. 5 crores [Section 10(23C)(iiiad)]
• Any hospital or other institution if the aggregate annual receipts do not exceed Rs. 5 crores [Section 10(23C)(iiiae)]

3.2 Institutions subject to approval from PCIT/CIT

The income of the following institution approved by the Principal Commissioner or Commissioner is exempt under this category:

• Any other fund or institution established for charitable purposes [Section 10(23C)(iv)];
• Any trust (including any other legal obligation) or institution wholly for public religious purposes or public religious and charitable purposes [Section 10(23C)(v)];
• Any university or other educational institution existing solely for educational purposes (not for purposes of profit) [Section 10(23C)(vi)]; and
• Any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes (not for purposes of profit) [Section 10(23C)(via)].

The approval category mentioned above is referred to as the exemption scheme under the First Regime under Section 10(23C). Sections 11 to 13 constitute the exemption scheme under the Second Regime. Currently, entities can choose either regime for tax exemption, but this option will gradually be phased out. While exact data is unavailable, most entities in India opt for the Second Regime, seeking exemption under Sections 11 to 13. There will be no change for entities under Section 10(23C) that do not require approval; they will continue to benefit from the exemptions available under Section 10(23C).

4. Process of Shifting from First Regime to Second Regime

No new applications for approval or provisional approval under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) will be accepted or considered on or after 01-10-2024. Applications filed under these sub-clauses before 01-10-2024 and still pending will be processed and considered under Section 10(23C) provisions. In other words, new registrations with a validity of five years under Section 10(23C) can be issued until 31-03-2025. Consequently, the sunset timeline for all organisations approved under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) will extend to the assessment year 2029-30. The government should have shifted the assessment under the second regime from an earlier assessment year.

Approved trusts, funds, or institutions will continue to avail exemption benefits under sub-clauses (iv), (v), (vi), or (via) of Section 10(23C) until their current approval expires. Afterwards, they will be eligible to apply for renewal of registration under the Section 12A regime. Amendments have been proposed in Section 12A to facilitate this transition.

5. Conversion of Provisional Approval under Section 10(23C) to Regular Registration under Section 12AB and Related Issues

It is proposed that applications for converting provisional approval under Section 10(23C), issued before 01-10-2024, must be submitted under Section 12A(1)(ac) if filed on or after 01-10-2024.

A suitable amendment has been proposed under section 12A(1)(ac)(iii), and the proposed amended clause with emphasis is as follows:

“(iii) where the trust or institution has been provisionally registered under section 12AB or provisionally approved under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, at least six months prior to the expiry of period of the provisional registration or within six months of commencement of its activities, whichever is earlier;”

Hence, the provisional approvals under Section 10(23C) issued before 01-10-2024 will be converted to regular registration under Section 12A if the conversion application is filed on or after 01-10-2024. Once the Provisional Approval is regularised under Section 12AB, the exemptions will only be available under Section 11. Therefore, the entity must be aware of the effective date of this change.

For example, if a Provisional Approval under Section 10(23C) is valid for the Assessment Years 2023-24 to 2025-26, and an application for regularisation under Section 12AB is submitted after 01-10-2024, the entity will receive regular registration under Section 12AB. Consequently, the Income Tax Return and Audit Report for the Assessment Year 2025-26 should be filed in accordance with the provisions applicable to organisations registered under Section 12A read with Section 12AB.

6. Additional Compliances Due to the Transition from Section 10(23C) to Section 11

In recent years, numerous amendments have been made that have minimised the differences between the benefits available under Section 10(23C) and Section 11. However, there are still specific compliance requirements that need to be taken care off after the transition from Section 10(23C) to Section 11.

• Requirement for re-registration on modification of objects: Under section 12A(1)(ab), if the trust has made some amendments to the object which do not conform to the conditions of registration, then it has to make an application for re-registration within 30 days from the date of adoption or modification of objects. However, no such requirement exists for organisations approved under section 10(23C).
• Application of income outside India: Activities outside India are restricted and subject to conditions under section 11(1)(c). However, no such clause existed for organisations approved under section 10(23C).
• Benefit of deemed application under Explanation 1(2) to Section 11(1): It provides an option to treat the subsequent year’s application as the current year’s application by filing Form 9A. However, Section 10(23C) does not offer a similar option.
• Treatment of Capital Gains: Capital gains arising to a charitable institution are not chargeable to tax if the institution invests the net consideration in acquiring a new capital asset [section 11(1)A]. This concession is not available under section 10(23C).
• Section 13(1)(a): Withdrawal of the benefit of exemption or cancellation of approval if the income is not used for public benefit, as per Section 13(1)(a). No similar clause exists for organisations approved under Section 10(23C).
• Section 13(1)(b): Withdrawal of the benefit of exemption or cancellation of approval if the income is used for the benefit of any particular religious community or caste, as per Section 13(1)(b). No such clause exists for organisations approved under Section 10(23C).
• Section 11(4): Provision regarding business held under trust, as specified in Section 11(4). There is no corresponding clause for organisations registered under Section 10(23C).

7. Enabling Window for Solely Educational Institutions to Shift from Section 10(23C) to Section 11

The Supreme Court of India, in its landmark judgment in New Noble Educational Society v. CCIT [2022] 143 taxmann.com 276, established important guidelines for educational institutions claiming exemption under Section 10(23C)(vi). The Court ruled that a “solely” educational institution must focus exclusively on educational activities and cannot engage in any other charitable or profit-making activities. In other words, all objects of the society, trust etc., must relate to imparting education or be in relation to educational activities.

Currently, there is no formal mechanism for such educational institutions to transition to exemptions under Section 11. Therefore, the proposed amendment offers these institutions a much-needed opportunity to shift to the second regime.

8. Reverting from a Solely Educational Institution to a Charitable Organisation

Following the Supreme Court ruling in the New Noble Educational Society (supra), many organisations approved under Section 10(23C)(vi) restricted their objectives to solely educational purposes. These organisations, having amended their by-laws to focus exclusively on education purposes, are no longer bound by such limitations when they shift to the Section 12A exemption regime.

Entities that have confined their objectives to “solely” educational purposes can now transit without such restrictions, as Section 11 does not impose these constraints. It is recommended that these entities amend their object clauses accordingly before transitioning to the second regime. Notably, there is no requirement for re-approval for modifications in objectives for entities approved under Section 10(23C).

It should be noted that technically, under Section 12A(1)(ab), re-registration is required if the modification of objectives results in any violation of registration conditions. In our opinion, an additional clause for permissible charitable activities is not considered a violation of registration conditions. However, the specified violations under Section 12AB(4) include any activity (including charitable activities) that goes beyond the stated objectives of the organisation. Therefore, it is recommended that amendments to the object clause should always be subject to the approval of the PCIT/CIT.