Claim of Expenses by Charitable Institutions & New Amendment Applicable from FY 2022-23
Charitable institutions enjoy tax exemption under the Income-tax Act 1961 (`Act`) provided they apply (spend) at least 85% of their yearly income on the objects for which they are set-up. The manner of such application was hitherto not defined in the Act and accordingly, it was determined on the method of accounting – cash or accrual system – followed by the charitable institutions. This meant charitable institutions following an accrual system could claim application where expenses were incurred during the year even if they were not actually before the end of the year. For example, expenses like salary, rent etc. for the last month of the year could be claimed as applied during the year even if they were actually paid in April of the following financial year.
However, you will recollect this has changed with effect from the current financial year 2022-2023 in light of the amendment made by the Finance Act 2022 (refer our budget note of 2022). In view thereof, expenses incurred by charitable institutions will now qualify for being considered as applied (spent) if and only if they are actually paid on or before the end of the financial year.
Accordingly, in order to claim application of expenses for FY 2022-2023, charitable institutions must ensure that all expenses for the year are actually paid on or before 31st March 2023