Income not to be included in regular income.
338
While computing the regular income of a registered non-profit organisation, the following income shall not be included:––
- (a) income applied outside India, where the Board, by general or special order, directs that such income shall not be so included in its total income in case of a registered non-profit organisation–– (i) created before the 1st April, 1952 for charitable or religious purposes; or (ii) created on or after the 1st April, 1952 for charitable purposes where such application of income outside India tends to promote international welfare in which India is interested;
- (b) the corpus donation received by the registered non-profit organisation under section 339.
Explanation
Section Summary:
Section 338 of the new income tax law specifies that certain types of income earned by registered non-profit organisations (NPOs) will not be included in their regular income when calculating taxable income. This provision is designed to encourage charitable and religious activities, both within and outside India, by providing tax exemptions for specific types of income.
Key Changes:
- Expanded Scope for International Welfare: The new law clarifies that income applied outside India by NPOs created on or after April 1, 1952, will not be included in their total income if it promotes international welfare in which India has an interest. This is a more explicit provision compared to the previous law, which may not have been as clear on this point.
- Corpus Donations: The section explicitly excludes corpus donations received under Section 339 from being included in the regular income of NPOs. This is a continuation of existing provisions but is now more clearly articulated.
Practical Implications:
- For NPOs: Registered non-profits can now more confidently apply income outside India for charitable purposes, knowing that such income will not be taxed, provided it meets the conditions outlined in the law.
- For Donors: Donors contributing to the corpus of NPOs can be assured that their donations will not be treated as taxable income for the organisation, which may encourage more contributions.
- For Compliance: NPOs must ensure that any income applied outside India aligns with the conditions specified (e.g., promoting international welfare in which India is interested) to avoid inclusion in taxable income.
Critical Concepts:
- Registered Non-Profit Organisation: An entity registered under the Income Tax Act for charitable or religious purposes, eligible for tax exemptions.
- Corpus Donation: A donation made to the permanent fund or capital of an NPO, which is not meant to be spent but rather invested to generate income for the organisation.
- Income Applied Outside India: Funds used by the NPO for charitable or religious purposes outside India, subject to specific conditions outlined in the law.
Compliance Steps:
- Documentation: NPOs must maintain proper records of income applied outside India, including evidence that such application promotes international welfare in which India is interested.
- Reporting: Ensure that corpus donations are clearly identified and reported separately in financial statements to avoid inclusion in taxable income.
- Board Orders: NPOs should be aware of any general or special orders issued by the Central Board of Direct Taxes (CBDT) regarding the application of income outside India.
Examples:
- Scenario 1: An NPO created in 1960 receives a donation of ₹10 lakh for its corpus. Under Section 338(b), this ₹10 lakh will not be included in the NPO's regular income and is therefore not taxable.
- Scenario 2: An NPO created in 1970 applies ₹5 lakh of its income to fund a health camp in a neighbouring country. If the CBDT determines that this activity promotes international welfare in which India is interested, the ₹5 lakh will not be included in the NPO's taxable income under Section 338(a)(ii).
This section reinforces the tax-exempt status of NPOs while providing clear guidelines for the treatment of income applied outside India and corpus donations.