Tax benefits of renting to charitable organisations

Why rent to a non-profit?

Legally stated, a non-profit organisation, also known as a not-for-profit organisation or charity, is a legal entity that does not generate profits for its members or owners, instead using its income to contribute to its mission or cause, which is often charitable purposes. However renting to a non-profit or charitable organisation comes with benefits for the landlord, as it offers both financial and social rewards. Primarily, it looks like a steady rental income and a stable tenantship, but there are add-on benefits for the landlords as they benefit from tax deductions, exemptions, and even reduced business rates.

Table of Contents

Also see: How to save tax on rental income?

Key tax benefits of renting to charities

1. Income Tax deductions

More so, in many jurisdictions, landlords can claim deductions on rental income if they lease property to a registered charitable organisation, these deductions apply to the following:

Reduced rates on rentals offered to the charity
Maintenance and property management costs
Legal and administrative fees related to the lease agreement

2. Capital Gains Tax (CGT) relief

Landlord, in case, sells a property that has been rented to a charity, they may be eligible for CGT relief, this applies to:

The property was rented at below-market rates to a registered charity
The sale is made to a non-profit organisation

3. Property tax reductions and business rates relief

Many local governments provide property tax relief to landlords who lease their properties to charities including:

Significant reduction in council tax or business rates
There is a full exemption from business rates, given that the charity uses the property for qualification (not all charities are automatically exempt from business rates).

4. Enhanced deductibility for charitable leases

In some cases, governments allow for enhanced deductibility when properties are rented to non-profits at reduced rates. This means landlords can claim:

Higher depreciation values on the property
Additional write-offs for tenant improvements

Taxation of charitable institutions and trusts: Income categories and exemptions

Income Type	Tax Treatment	Conditions & Exceptions
Voluntary donations (With specific corpus direction)	Fully exempt	The donation must be explicitly directed to the corpus fund of the trust.
Voluntary donations (without specific direction)	Partially Exempt	Considered as income from property held under trust. Exemption available if funds are used per regulatory guidelines.
Anonymous donations (No donor record kept)	Taxed at 30% on excess amount	The tax applies if anonymous donations exceed the higher of: 1) 5% of total donations received 2) ₹1,00,000
Anonymous donations to religious/religious-charitable trusts	Treated as regular voluntary contributions	The exemption applies under standard conditions, no additional penalties for anonymity.
Income from trust property used for charitable/religious purposes in India	Fully exempt	At least 85% of income must be applied towards the intended purpose.
Income set aside for future charitable/religious use	Exempt up to 15%	Trusts can retain 15% of their income without spending it immediately and still claim exemption.
Foreign charitable trust Income (promoting India’s welfare internationally)	Exempt if CBDT approval is obtained	The Central Board of Direct Taxes (CBDT) must issue a special or general directive for the exemption to apply.
Capital Gains from trust-owned assets	Fully exempt if gains are reinvested	The trust must use the full sale proceeds to purchase another asset.
Partial reinvestment of Capital Gains	Exempt on the reinvested portion	The unused portion of the capital gain is taxable.

Sample calculation:

Assumptions:

Market Rent: ₹100,000 per month (what the landlord would charge in a regular rental agreement)
Rent Discount for NGO: 30% (the landlord offers a discount to the NGO)
Annual Rent Reduction: The landlord offers the property at a 30% discount from the market rent to the NGO.
Annual Maintenance and Property Management Costs: ₹50,000 per year (eligible for tax deductions)
Capital Gains Tax Relief on Sale of Property to NGO: Assume 100% exemption if the property is sold below market value to the NGO (in this example, we’ll focus on the rent reduction and maintenance).

The formula for Savings from Renting to NGO:

1. Income Tax Deductions on Rent Discount:

The landlord can claim deductions on the rent offered below the market rate. This would typically be a percentage of the rent discount.

Rent Discount per Year:
Annual Rent Discount = Market Rent per Year − Rent Received from NGO per Year
- Market Rent per Year:
  Market Rent per Year = Market Rent per Month × 12 = ₹100,000 × 12 = ₹1,200,000
- Rent Received from NGO per Year:
  Rent Received from NGO per Year=Market Rent per Year× (1−Discount Percentage)

Rent Received from NGO per Year = ₹1,200,000 × (1−0.30) = ₹1,200,000 × 0.70 = ₹840,000

Rent Discount per Year:
Rent Discount per Year = ₹1,200,000 − ₹840,000 = ₹360,000
The landlord can deduct ₹360,000 (the rent discount) as an income tax expense.

2. Maintenance and Property Management Cost Deductions:

If the landlord incurs maintenance and property management costs, these can typically be claimed as deductions.

Total Maintenance and Property Management Deductions: Maintenance Deductions=₹50,000 per year

3. Total Income Tax Deduction:

Income tax deductions are typically calculated on the sum of the rent discount and maintenance costs. The formula is:

Total Income Tax Deductions = Rent Discount + Maintenance Deductions

Total Income Tax Deductions = ₹360,000 + ₹50,000 = ₹410,000

4. Capital Gains Tax Relief on Property Sale to NGO:

If the landlord sells the property to the NGO at below-market value, they may qualify for Capital Gains Tax (CGT) relief, assuming the sale meets the conditions. If this is the case, the landlord may be able to avoid CGT on the property sale.

Let’s assume the landlord originally purchased the property for ₹10,000,000 and intends to sell it at ₹9,000,000 to the NGO:

Capital Gains = Sale Price − Purchase Price
Capital Gain = ₹9,000,000 − ₹10,000,000=−₹1,000,000

In this case, the landlord is selling the property at a loss. So, no CGT is applicable if the sale is to the NGO at a discounted price, and the landlord can potentially save on capital gains tax.

5. Tax Savings from the Rent Discount and Maintenance Deductions:

Let’s assume the landlord’s income tax rate is 30%. The total tax savings from the rent discount and maintenance cost deductions would be:

Tax Savings = Total Deductions × Income Tax Rate
Tax Savings=₹410,000 × 0.30 = ₹123,000

Do charitable institutions qualify for tax exemptions?

For a trust or non-profit to claim Income Tax exemption, it must be:

Registered under Section 12AB of the Income Tax Act
Primarily engaged in charitable or religious activities
Using at least 85% of its income for charitable purposes in India

Failure to meet these conditions may result in tax liabilities on the institution’s income.

What constitutes a ‘charitable purpose’ for tax exemption?

The law defines charitable purposes under six broad categories:

Relief of the poor (food distribution, housing, employment aid)
Education (schools, research, vocational training)
Yoga (wellness centres, traditional practices)
Medical relief (hospitals, clinics, mental health services)
Preservation of the environment (conservation, sustainable development)
General public utility (public infrastructure, rural development, awareness programs)

Non-profits working within these categories can claim Income Tax benefits on donations and operational funds.

What happens if 85% of income is not applied?

If a trust does not apply 85% of its income, it may still claim an exemption under two conditions:

Income deemed as applied

Income not yet received: If income has not been received during the financial year, it can be applied in the following year.
Income received but not spent: The organisation can carry forward the amount and use it for charitable purposes in the next financial year.
Form 9A compliance: The trust must submit Form 9A electronically when filing its Income Tax Return.

Accumulation of unapplied income

If the 85% threshold is not met, the trust can accumulate the remaining portion for future charitable use.
Proper disclosure and filing under specified tax conditions is mandatory.

How is religious income taxed?

The term ‘religious purpose’ is not defined explicitly under the Income Tax Act, but generally includes:

Promotion of faith, religious education, or rituals
Support for religious institutions, places of worship, or community aid
Propagation of religious values

Only public religious trusts are eligible for tax exemptions. Private religious trusts do not qualify for tax benefits.

Key tax benefits of renting to a non-profit or charity

Rental income exemptions

If the entire property is used for registered charitable activities, rental income may be exempt from tax.
Partial use for non-charitable activities could lead to proportional taxation.

Capital gains tax relief

If a property is donated or leased to a trust, capital gains may be waived or reduced.
Reinvestment of proceeds from a sale into another charitable asset can retain tax-free status.

Property tax rebates

Many local governments offer property tax deductions or waivers for renting to charitable organisations.

Legal considerations for renting to a non-profit

Eligibility criteria for tax benefits

To qualify for tax benefits, landlords must ensure that:

The tenant is a registered charity or non-profit
The lease agreement specifies charitable use
Any rent discounts are documented properly

Documents required for 80G and 12AB Registration

Documents for 80G registration (Tax deduction for donors)

PAN Card of the trust
List of donors
Memorandum of Association (MoA) and Registration Certificate
Income Tax Returns and Financials (past 3 years)
Bank statements and audited accounts
Form 10G for application
List of welfare activities conducted

Documents for 12AB registration (Tax exemption for trusts)

Form 10A submission
PAN Card of the trust
Trust Deed / Incorporation documents
Financial statements for the past 3 years
Details of trustees and board members

Proper registration under 12AB and 80G ensures maximum tax benefits for both landlords and non-profits.

How to structure a lease for maximum tax efficiency

Long-term leases vs. short-term agreements

In the case of long-term leases, these often provide greater tax relief, while short-term arrangements may require specific approvals for tax benefits from the governmental authorities.

Market vs. below-market rent

Leasing at a below-market rate can help the landlord in availing additional deductions, but it is essential to comply with tax regulations primarily; this is done to avoid underreporting rental income and legal repercussions.

Minimum requirement for income application

A charity trust or organisation must use at least 85% of its income to further its goals in order to be tax-exempt; if this requirement is not fulfilled, the remaining funds may be saved or retained under particular constraints.

Conditions for income accumulation

A trust or institution opting to accumulate income instead of immediate application must fulfil the following conditions:

Submission of form No. 10: The trust must electronically submit Form No. 10 as a notice of accumulation two months of the due date for filing the income tax return.
Defined purpose: The trust must clearly specify the purpose for which the income is being accumulated.
Time limit: The accumulation period must not exceed five years. If the income is held due to a court order or injunction, such years are excluded from the five-year calculation.
Investment in approved instruments: The accumulated income must be invested or deposited in government-specified modes and cannot be donated to another trust.

Failure to comply with these conditions will lead to taxation of the accumulated income under the following circumstances:

Violation category	Taxation year
Used for a purpose other than charitable or religious	Year of such application
Investment ceases to comply with specified modes	Year of non-compliance
Not utilised within the permitted five-year period	Last year of accumulation

Approved investment modes for accumulated income

The accumulated income must be applied within India and invested through one of the following approved methods:

Government savings certificates or UTI schemes
Deposits in post office savings banks, scheduled banks, or cooperative banks
Investment in immovable property
Securities issued by the Central or State Government
Fully guaranteed company debentures by the Central or State Government
Public sector company investments or deposits
Financial corporation or public company bonds engaged in long-term industrial financing in India

Cases where exemption does not apply

The following types of income do not qualify for exemption under tax laws:

Private religious trusts: Income from properties held for private religious purposes that do not benefit the public.
Restricted community benefit: Income of trusts benefiting only specific religious communities or castes.
Use for specified individuals: Any trust or institution income utilised for the benefit of certain specified individuals.
Non-compliant investments: If the trust fails to invest its income as per the prescribed modes.
Medical and educational services: The value of medical or educational services provided to specified persons by a trust operating hospitals or educational institutions.
Business income: Any profits and gains from business activities, unless such activities are incidental to the trust’s objectives and separate books of accounts are maintained.

Definition of specified persons

For compliance purposes, certain individuals or entities are considered specified persons, and income used for their benefit is not exempt. These include:

The author or founder of the trust or institution
Substantial contributors, defined as individuals contributing over Rs. 50,000 up to the financial year’s end
HUF members, if the founder or contributor is a Hindu Undivided Family
Trustees or managers of the trust
Relatives of the above-mentioned individuals
Concerns in which specified persons hold a substantial interest (i.e., over 50% contribution up to the financial year’s end)

By adhering to these guidelines, charitable trusts and institutions can ensure compliance with tax regulations while effectively managing their accumulated income for future application toward their objectives.

Section 11 of the Income Tax Act: Exemption for charitable trusts

The Indian central government supports charitable and religious institutions through various tax exemptions under Section 11 of the Income Tax Act as the section provides tax relief for income derived from property held by such institutions (provided they operate solely for charitable or religious purposes). Therefore, these exemptions are contingent upon obtaining a registration certificate under Section 12A or 12AA and fulfilling compliance requirements (such as audited accounts and timely tax filings).

Key provisions and conditions:

Institutions, hitherto, must use their income for charitable purposes and cannot directly or indirectly benefit the settlor, trustees, or specific religious communities.
Donations received must align with Section 12, and investment of funds must comply with Sections 11(5) and 13(1) to maintain tax-exempt status.
Up to 15% of total revenue can be retained without immediate utilisation for charitable purposes.
Capital gains exemptions apply when the proceeds are reinvested into assets serving religious or charitable objectives.

Recent Budget 2025 update:

There is an amendment proposed with reference to Section 12AB that clarifies that incomplete applications for trust registration will not be considered a “specified violation,” this is to ensure more flexibility in the registration process in future.

Section 11(2) and income accumulation:

According to Section 11(2), when charitable trusts can accumulate income of more than 15% for up to five years, provided they notify tax authorities (“Form 10”) and adhere to investment restrictions, the provision enables institutions to build long-term capital to sustain their initiatives.

Section 11(4) and business undertakings:

If a trust supposedly owns a business, its income will be subject to scrutiny by tax authorities so any excess earnings beyond what is reported may be presumed to be used for non-charitable purposes unless proven otherwise by relevant parties.

Section 11(5) and approved investment modes:

Specific investment avenues in the act include the following:

Government savings certificates and securities
Bank and post office deposits
Public sector company shares
UTI units and certain debentures
Investments supporting skill development and urban infrastructure

Real-life examples:

Trusts running hospitals for humanitarian purposes
Societies operating educational institutions
Organisations providing scholarships or financial aid

To claim exemptions, charitable institutions must also comply with other related provisions, such as Sections 60-63 and 12 (including 12A and 12AA). Consulting tax professionals ensures adherence to regulations and maximises benefits.

How to apply for tax benefits as a landlord

Steps to claim Income Tax deductions

Verify charity registration
Maintain a proper lease agreement
File for tax relief in your annual returns

Applying for property tax exemptions

Contact the local tax authority for forms and requirements
Provide evidence of charitable use of the property

Common pitfalls to avoid

Not verifying the charity’s registration

Ensure that the tenant is officially recognised as a charitable organisation to avoid legal and tax issues.

Lack of proper lease documentation

Without a documented lease, tax authorities may reject claims for tax benefits.

Failure to maintain property for charitable use

Tax benefits may be revoked if the charity ceases operations on the premises or uses it for non-charitable purposes.

Housing.com POV

Renting to a non-profit or charitable organisation offers landlords the potential for steady rental income, significant tax advantages, and social impact. From tax deductions on rent discounts and maintenance costs to exemptions from capital gains tax and property tax relief, the financial benefits are considerable. Landlords, therefore, can take pride in supporting a cause aligned with their values, contributing to the community while enjoying the stability that comes with a long-term, reliable tenant.

FAQs

Can I claim tax benefits if I rent to a non-profit at market rates?

Yes, but benefits may be limited compared to renting at below-market rates. Income tax deductions and business rates relief may still apply.

How do I prove that my property is being used for charitable purposes?

Obtain written confirmation from the charity, lease documents, and utility bills showing usage under the organisation’s name.

Are all charities eligible for tax relief when renting property?

No, only registered charities with official tax-exempt status qualify. Check with your local tax authority.

Do I need to register as a charity landlord?

Generally, no, but you must ensure compliance with tax regulations and proper documentation for tax relief.

Will I still need to pay VAT on maintenance costs?

VAT does not apply to rental income.

What happens if the charity moves out before the lease term ends?

You may lose certain tax benefits if the property is no longer used for charitable purposes.

Can I rent to a non-profit and still make a profit?

Yes! You can structure leases to ensure fair rent while benefiting from tax incentives.

Got any questions or point of view on our article? We would love to hear from you.Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com

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