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Comparison between Trust, society & AOP, which is more beneficial from tax point of view

By gkkedia Dt. June 20th, 2020

Charitable or religious trust

  • Income tax on various types of income of charitable trust
Category of income Income subject to tax Taxability
Donations/voluntary contributions Voluntary contributions with a specific direction to form part of corpus of trust or institution Exempt*u/s11(1)(d)
Voluntary contribution without
such specific direction
Forms part of income from property held under trust
Anonymous donations** Donation exceeding higher of :(a) 5% of total donation received by trust or (b) Rs.1,00,000 Taxed at 30%
Anonymous donation received by trust established wholly for religious and charitable purpose. Forms part of income from property held under trust
Income from property held under trust for charitable or religious purpose Income applied for charitable or religious purpose in India Exempt*u/s11(1)(a)
Income accumulated or set aside for the application towards charitable or religious purpose in India Exempt* to the extent of 15% of such income. This means at-least 85% of income from property to be applied for charitable and religious purpose in India as above and balance 15% can be accumulated or set aside.
Income from property held under trust created for charitable purpose which tends to promote international welfare in which India is interested CBDT either by general or special order has directed that such income shall not be included in the total income of trust Exempt*u/s11(1)(c)
Capital gain from asset held under trust in whole Net consideration is utilised fully for acquiring another capital asset Entire capital gain is deemed to have been applied for charitable and religious purpose and hence is exempt*
Net consideration is utilised partially for acquiring another capital asset Capital gain utilised in excess of cost of old asset transferred is considered to have been applied for charitable and religious purpose and is exempt*

 
Only Charitable/ religious trust or institution registered under Section 12AA enjoys the exemption. donations where donee does not maintain record of identity/any particulars of the donor.

  • Trusts and institutions formed for promotion of scientific research, education, sports, certain professions, khadi and village industries, etc., or as hospitals and notified charitable or religious institutions, are entitled for total exemption from tax under Section 10 of the Income Tax Act.
  • As per the circular on 11th October 2019, GST on donations or gifts received from individual donors by charitable organisations exempted for displaying name plates in the name of the individual donor for acknowledging the donors.

 
Co-operative society

  • the Union Budget proposed to provide an option to cooperative societies to be taxed at
    22% + 10% surcharge and 4% cess with no exemption/deductions.
  • Tax rate

    Income range Tax rate
    Upto 10,000 10%
    10,000-20,000 20%
    Above 20,000 30%

     
    If total income of co-op. society exceeds Rs. 1 crore, the surcharge is levied at the rate of 12% on the amount of tax payable on total income. The health and education cess is levied at the rate of 4% on the amount of income tax plus surcharge.

    The Finance Minister also proposed to exempt these cooperative societies from Alternate Minimum Tax (AMT) just like Companies that under the new Co-operatives Tax Rate regime are exempted from the Minimum Alternate Tax (MAT).

    • There are certain types of cooperatives, like housing cooperatives, who collects monthly subscription from the members and spends the same to meet the various joint expenses of the society to give service to members. In this process even if any surplus is generated, it is not chargeable to tax as it is exempt based on the ‘concept of Mutuality’.
    • The cardinal requirement in case of mutual association is that there should be complete identity between the contributors and the participators
    • (c) Presently, interest credited or paid by a co-operative society to a member or to any other co-operative society is not liable for tax deduction at source in view of section 194A(3)(v).Similarly, interest credited or paid in respect of deposits with a primary agricultural credit society or primary credit society or co-operative land mortgage bank or co-operative land development bank is not liable for tax deduction in view of section 194A(3)(viia).

     
    As per Finance Bill, 2020 co-operative societies are liable to deduct tax at source as given below:
    Where the total sales, gross receipts or turnover exceeds Rs.50 crores during the financial year immediately preceding the financial year in which the interest is credited or paid; and (ii) The amount of interest or the aggregate amount of interest credited or paid is more than Rs.50,000 to a senior citizen and Rs.40,000 to any other person, – tax shall be deducted at source at 10%. This amount is effective from 01.04.2020.

    • tax audit provisions are generally not applicable to societies which do not carry on any business.
    • Section 80P of the Income Tax Act 1961 allows deduction in respect of income of cooperative societies which are attributable to specified activities.

     
    Association of persons (AOP)
    Under Income Tax Law, apartment owners association is categorized as Association of Persons (AOP). Complete tax exemption is given for funds or surplus where the concept of mutuality applies. Following are income not subject to tax

    • Interest Earned from Co-operative Banks: Interest earned from investment made in cooperative bank qualifies for 100 per cent deduction under Sec 80P (d).
    • Income earned from its member’s contribution: The contribution or any surplus fund is carried forward to next fiscal year and no income tax is charged on such contributions.
    • Rentals received from members: The apartment owners association can rent out common facilities in apartment to its members for a fee
    • Dividend from Indian Companies: Divided received from Co-operative banks are qualified for 100 per cent tax exemption under Sec 80P (d).
    • Exemption on donations made: Apartment owners association can enjoy 100 % tax deduction on donations made for medical relief set up by state government, prime minister’s national relief fund etc.

     
    Applicable tax slab rate :-

    Income threshold Tax rate
    Upto 2,50,000 nil
    2,50,000 – 5,00,000 5%
    5,00,000- 10,00,000 20%
    Above 10,00,000 30%

     
    In case income is more than ₹ 50 lakhs and less than ₹ 1 crore, the surcharge is applicable at a rate of 10% of the income tax. For income more than ₹ 1 crore, a surcharge of 15% is applicable on income.

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