Taxable regular income.

336

The taxable regular income of a registered non-profit organisation for any tax year shall be––

• (a) nil, where 85% or more of the regular income for such tax year has been applied or accumulated under section 342 for charitable or religious purposes, in such tax year as per the provisions of this Part; and
• (b) in any other case, 85% of the regular income for such tax year as reduced by its application for charitable or religious purposes or accumulation thereof under section 342 in such tax year as per the provisions of this Part

Explanation

Section Summary:

Section 336 of the new income tax law outlines how the taxable regular income of a registered non-profit organization (NPO) is determined for a given tax year. The section provides two scenarios based on how much of the NPO's regular income is applied or accumulated for charitable or religious purposes under Section 342.

Key Changes:

1. Threshold for Tax Exemption: The section introduces a specific threshold (85%) for determining whether the NPO's regular income is fully exempt from tax. If 85% or more of the regular income is applied or accumulated for charitable or religious purposes, the taxable regular income is nil.
2. Taxable Income Calculation: If the NPO fails to meet the 85% threshold, the taxable income is calculated as 85% of the regular income minus the amount applied or accumulated for charitable or religious purposes.

Practical Implications:

1. For NPOs: NPOs must ensure that at least 85% of their regular income is either spent or set aside for charitable or religious purposes to avoid taxation. Failure to meet this threshold will result in a portion of their income being taxed.
2. Compliance Burden: NPOs need to maintain detailed records of how their income is applied or accumulated for charitable purposes to substantiate their claims under this section.

Critical Concepts:

1. Regular Income: Refers to the income generated by the NPO from its regular activities, excluding any capital gains or other specific types of income.
2. Application or Accumulation: "Application" refers to the actual spending of income on charitable or religious activities, while "accumulation" refers to setting aside funds for future use in such activities, as permitted under Section 342.
3. Section 342: This section governs how NPOs can apply or accumulate income for charitable or religious purposes. Compliance with Section 342 is necessary to benefit from the tax exemption under Section 336.

Compliance Steps:

1. Track Income and Expenditure: NPOs must accurately track their regular income and the amounts spent or accumulated for charitable or religious purposes.
2. Maintain Documentation: Keep detailed records of all expenditures and accumulations to demonstrate compliance with the 85% threshold.
3. File Returns Accurately: Ensure that tax returns reflect the correct calculation of taxable income based on the application or accumulation of funds.

Examples:

1. Scenario 1: An NPO has a regular income of ₹10,00,000 in a tax year. It spends ₹8,60,000 on charitable activities and accumulates ₹50,000 for future charitable purposes. Since 91% of the income (₹9,10,000) is applied or accumulated, the taxable regular income is nil.
2. Scenario 2: Another NPO has a regular income of ₹10,00,000 but only spends ₹7,00,000 on charitable activities and accumulates ₹1,00,000. Here, 80% of the income is applied or accumulated, which is below the 85% threshold. The taxable income is calculated as 85% of ₹10,00,000 (₹8,50,000) minus ₹8,00,000 (₹7,00,000 + ₹1,00,000), resulting in ₹50,000 taxable income.

This section ensures that NPOs prioritize their charitable or religious objectives while providing a clear framework for taxability based on their compliance with these objectives.