What are the benefits of registration under Section 12A?

Income Tax is a complex subject and it inspires fear in laymen. One big reason for this fear is the rate of tax at which individuals and firms pay taxes on their income. Since there are different slabs for different ranges of income, it is difficult to calculate a person’s tax liability. Some people seek the services of chartered accountants while others simply ignore paying their due share to the government exchequer.

This leads to a substantial loss of revenue each year as compared with what should have been collected by Government if all taxpayers had abided by law in letter and spirit.

Various remedial measures have been introduced over time, including self-filing for ITR and online documentation for easy proceedings.  To increase the compliance rate in tax returns, the government has introduced section 12A, which is applicable to an Indian trust or a Section 25 company.

What is section 12A registration?

A section 25 company is incorporated with an aim of providing benefits for members of a mass which are not available from any other source. The most obvious example would be colleges that provide education and training to students under various schemes. These institutions follow a particular policy and abide by certain rules in accordance with their act of incorporation (The MCA 1956).

The institution charges fees every semester from the student who then files his return and pays taxes accordingly according to his income level. A section 25 company can apply for registration under section 12A if it fulfils all conditions required by law.

As per Section 2 (xxvi) (A) of the MCA 1956, a company that is being registered under section 25 would be eligible for registration under section 12A if it fulfils the following conditions:

  • Charitable Trusts, Religious Trusts, Societies and Section 8 Companies claiming exemption under Section 11 and 12 of the Income Tax Act, must obtain 12A registration. Private or family trusts are not allowed such exemptions and cannot obtain 12A registration.
  • The company must have a minimum paid up equity capital of Rs.500000/-
  • The company must not have more than 50 members all of whom are individuals having an annual income from salary and business profits below a specified limit as prescribed by RBI every year.
  • The total income must not exceed Rs.1 lakh in any previous financial year and in the case of two consecutive years, the total income should not exceed this amount by more than 10%.

These companies may avail certain tax benefits on some incomes like long-term capital gains, short-term capital gains. There are many benefits of registering under Section 12A.

Benefits of Section 12A Registration

  • The fund being used for charitable or religious purposes will be part of the income application. The income application is the expenses incurred for charitable or religious purposes when calculating the income of the charitable or religious trust.
  • The income received by the trust will be taxation free.
  • Persons registered under Section 12A can avail numerous benefits for setting aside income or accumulating income which does not exceed more than 15% for the charitable trust or religious purposes.

  • Accumulation of income which is part of the income application according to 12A registration, under section 11(2) is excluded from the total income.

  • Registration made under section 12A is a onetime registration. Once registered under section 12A, the proceedings will be active till the cancellation date of the registration. There are no requirements for renewing the registration. Thus, these benefits are claimed by NGOs liberally.

For CAs in India working with ITR, 12A registration is a true blessing. It makes the paperwork and workload so much easier and thus helps CAs serve their clients and the nation better. And if you are dealing with regular ITR filing on a constant basis, we may have a solution for CAs in India to work faster, better and incur less costs in the process.

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CAs admit that handling cash flow is one of the most challenging parts and Unpaper’s intelligent revenue management system along with the automated workflow has helped CAs in India scale up efficiently.

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