Interest income earned by charitable institutions could come under the tax net. At present, this income is tax-free if the institutions reinvest 85% of the earnings in charitable activities.

The finance ministry has decided to visit the field anew. It has consulted tax experts, including the National Institute of Public Finance & Policy, in the run-up to Budget to develop a viable taxation plan for the sector.

Income-tax provisions allow a notified charitable institution to receive a tax-free donation, which it can invest in specified securities. Section 11(5) of the I-T Act specifies the types of securities in which the donations can be invested in, like post office deposits, government bonds and deposits with banks.

Tax laws say 85% of the interest income must be ploughed back into charitable purposes. The only exception to this rule is for institutions, which provide a declaration that the sum would be invested in specific projects.

This means a donation made to such institutions or trusts remains tax-free not just at the accumulation stage, but also at the vesting stage. This is similar to the status enjoyed by some small savings schemes.

NO FREE LUNCHES
Finance ministry has decided to visit the subject of taxing charities anew
I-T provisions allow tax-free donations which can be invested in specified securities
Charities have escaped the tax net because they work for the public good
 
Tax experts say charitable institutions have for long escaped the tax net because they worked for the public good. Hence, any move to tax them raises an emotive issue.

For instance, the government subjected anonymous donations to non-religious trusts to a 30% tax in the last Budget. But many institutions have already pleaded with the finance ministry to relax the measure.