What Is Tax Exemption?
Tax exemption refers to legal relief from paying income tax on specified income, activities, or entities as allowed under the Income Tax Act, 1961. Common tax exemptions include:
- Startup tax exemption
- NGO and trust tax exemption
- Section-based exemptions (such as 10, 11, 12, 80)
Each exemption requires separate application and approval.
Who Can Apply for Tax Exemption?
Tax exemption can be applied by:
- DPIIT-recognized startups
- Trusts and societies
- Section 8 companies
- Charitable and religious institutions
- Educational and medical institutions
Eligibility depends on the specific section under which exemption is claimed.
Step-by-Step Process to Apply for Tax Exemption
Step 1: Identify Applicable Tax Exemption
Determine the correct exemption category based on:
- Nature of entity
- Purpose and activities
- Applicable section of Income Tax Act
Choosing the wrong section may lead to rejection.
Step 2: Ensure Eligibility Conditions
Before applying, confirm:
- Proper incorporation or registration
- No prohibited commercial activity (if applicable)
- Compliance with turnover or age limits
- Valid registrations (PAN, GST if applicable)
Eligibility must be met before application.
Step 3: Prepare Mandatory Documents
Commonly required documents include:
- PAN of entity
- Certificate of incorporation or registration
- Founding documents (MOA, trust deed, bye-laws)
- Financial statements and projections
- Activity note and objectives
- Bank account details
Document accuracy is critical.
Step 4: Register on Income Tax Portal
Log in to the Income Tax e-filing portal using:
- Entity PAN
- Authorized signatory credentials
- Valid DSC or Aadhaar-based verification
All exemption applications are filed online.
Step 5: File Online Application Form
Submit the relevant online form as applicable:
- Enter entity details and activity description
- Upload supporting documents
- Verify application digitally
Forms differ based on exemption type.
Step 6: Respond to Queries or Notices
The Income Tax Department may:
- Seek clarification or additional documents
- Issue online notices
Timely response ensures faster approval.
Step 7: Approval or Rejection Order
Upon review:
- Tax exemption approval is issued digitally
- Approval certificate/order is downloadable
- Rejection is communicated with reasons
Approval timelines vary by case.
Post-Approval Compliance Requirements
After receiving tax exemption:
- File annual Income Tax Returns on time
- Maintain books of accounts
- Use funds strictly for approved purposes
- File audit reports if applicable
Non-compliance may lead to cancellation.
Benefits of Applying for Tax Exemption
- Significant tax savings
- Improved cash flow
- Increased credibility with donors and investors
- Legal compliance and peace of mind
Common Reasons for Rejection
- Incomplete or incorrect documentation
- Activities not matching stated objectives
- Non-compliance history
- Late or improper responses to notices
Professional review reduces rejection risk.
Conclusion
Applying for tax exemption is a strategic and compliance-driven process that offers long-term financial benefits when done correctly. Whether you are a startup or a nonprofit entity, understanding eligibility, documentation, and post-approval responsibilities is essential to retain exemption benefits and avoid penalties.
Disclaimer
This article is for informational purposes only and does not constitute legal, tax, or professional advice. Tax exemption eligibility, procedures, and approvals are subject to applicable laws, rules, and departmental discretion. Readers are advised to consult qualified professionals before applying for or relying on any tax exemption.