Understanding Section 11/12 Exemptions, Revenue Activities & Compliance Rules
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Tax Rules for NGOs Doing Business: Section 11/12 & Income Exemptions
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Learn how NGOs and social enterprises are taxed in India. Understand Section 11/12 exemptions, revenue-earning rules, and compliance norms for charitable organisations.
Introduction
Many NGOs and social impact enterprises in India engage in revenue-earning activities — such as selling products, training programs, social innovation projects, or service delivery. But a major question arises: Is this income taxable?
Under the Income Tax Act, Sections 11 and 12 offer exemptions — but only if strict conditions are met. In this blog, we decode how tax rules apply when an NGO earns revenue, what income is exempt, how commercial activities are treated, and the compliance requirements every nonprofit must follow.
This is especially useful for NGOs and social enterprises across Maharashtra, Kolhapur, Pune, and Mumbai, where mission-driven organisations increasingly combine charity with sustainable business models.
What Counts as a Social Impact Enterprise / NGO?
A social impact enterprise or NGO is a legally recognized entity working for charitable, educational, social or environmental causes.
Common legal forms:
- Society
- Trust
- Section 8 Company (under Companies Act)
These entities may engage in commercial or revenue-generating activities only if the profits are used 100% for charitable purposes and not distributed to members.
Is Revenue-Earning Allowed for NGOs?
Yes — NGOs can earn revenue legitimately through:
- Training programs
- Sale of goods (handicrafts, social products)
- Service delivery (education, medical, rural services)
- Consultancy for social initiatives
- Corporate CSR project execution
BUT tax exemption applies only when:
- The activity is incidental to the main charitable objective; and
- Separate books of accounts are maintained.
Exemption Structure Under Section 11 & 12
Section 11 — Income from Property Held for Charitable Purposes
NGOs can claim exemption on:
- Donations
- Grants
- Membership fees
- Revenue from activities incidental to objectives
Conditions:
- 85% of income must be applied for charitable purposes in India.
- NGO must be registered under Section 12AB.
- Funds must not benefit trustees or related parties.
Section 12 — Voluntary Contributions
Voluntary contributions (donations) are also treated as “income from property held under trust” and eligible for exemption.
Business Income Rules for NGOs — Section 2(15)
Section 2(15) defines “charitable purpose” and places restrictions on commercial activity.
An NGO can carry out business/commercial activities only when:
- The activity is incidental to the main object (education, relief, environment, etc.).
- The receipts from commercial activity do not exceed 20% of total receipts (for most categories).
- Profits are fully applied to the charitable objectives.
If an NGO crosses these limits, exemption under Section 11 may be denied, and income becomes taxable at maximum marginal rate (MMR).
What Portion of NGO Income Is Exempt?
Exempt Income:
- Donations (other than anonymous donations)
- Grants (CSR, government, corporate)
- Revenue from incidental activities (example: vocational training fees)
- Interest income used for charitable purpose
- Surplus from charitable activities
Taxable Income:
- Business income not incidental to objectives
- Anonymous donations (above limits)
- Income used for private benefit
- Commercial receipts exceeding 20% threshold
- Income applied outside India (exceptions exist)
Common Compliance Requirements for NGOs
To retain exemption, NGOs must comply with:
1. 12A/12AB Registration
Mandatory to claim exemptions under Section 11/12 — renewed or revalidated periodically.
2. 80G Registration
Allows donors to claim tax benefits.
3. Maintain Separate Books for Business Activity
If earning through training, sales, or any commercial project.
4. File Form 10B / 10BB (Audit)
Applicable when income exceeds prescribed limits.
5. Application of 85% of Income
Must be spent on charitable purposes during the year or accumulated with Form 10.
6. CSR Compliance (if applicable)
If receiving CSR funds, usage must follow CSR rules.
7. Annual ITR Filing — ITR-7
Mandatory for all NGOs, even if income is exempt.
Case Example: NGO with Training Income
Scenario:
An NGO in Kolhapur conducts free skill training but also offers paid advanced workshops to sustain operations.
Receipts:
- Donations: ₹18 lakh
- Paid training fees: ₹3 lakh
- Grants: ₹4 lakh
- Total receipts: ₹25 lakh
Analysis:
- Commercial receipts = ₹3 lakh
- Percentage = 12% → Within 20% limit under Section 2(15).
- NGO maintains separate books for training income.
- 85% of total income is applied to charitable work.
Result:
NGO stays eligible for Section 11 exemption and pays no tax.
If training income crossed 20% or was not incidental → the entire income could become taxable.
Best Practices for NGO Accounting & Tax Planning
- Maintain transparent, audited books for all revenue activities.
- Keep business income “incidental” — align with your charitable mission.
- Track commercial receipts to ensure they don’t exceed 20% threshold.
- Use Form 10 for income accumulation when needed.
- Avoid cash transactions to maintain credibility.
- Maintain proper donor records, receipts, and utilization reports.
FAQs
Q1. Can NGOs run full-fledged businesses?
Yes, but only if business is incidental to objectives and receipts are within 20% limit — else exemption may be denied.
Q2. What happens if commercial income exceeds the limit?
The NGO may lose exemption under Section 11 and be taxed at maximum marginal rate.
Q3. Is income from social enterprises always exempt?
Exempt only if:
- It supports charitable objects,
- Proper books maintained,
- Falls within Section 2(15) limits.
Q4. Do NGOs pay GST?
If they provide taxable services for a fee, GST may apply — exemptions depend on activity type (education, health, etc.).
Q5. Which ITR do NGOs file?
All NGOs and trusts must file ITR-7.
Conclusion & CTA
Revenue-earning activities can help NGOs become financially sustainable — but tax exemption depends on strict compliance with Section 11/12 and Section 2(15) rules. Proper accounting, documentation, and adherence to the 20% business-income limit ensure NGOs remain compliant and tax-exempt.
At Verotus Finlegal Solutions LLP,
we assist NGOs, social impact enterprises, and Section 8 companies with:
- Registration (12AB, 80G)
- Audit & ITR-7 filing
- Compliance under Section 11/12
- Structuring revenue activities to remain tax-exempt
📞 Book a consultation today to ensure full compliance and tax optimization for your NGO.
🌐 www.verotusllp.com
