To begin with, Section 80P of the Income Tax Act allows for an income tax deduction for cooperative societies. This is meant to incentivize people to join and participate in cooperative societies, enabling them to enjoy lower tax rates.
Additionally, it also allows for deducting any interest or dividend income earned from investments in cooperative societies.
As per S.80P, a tax deduction of up to 100% of profits from specified business activities is allowable for cooperative societies. This means that cooperative societies do not have to pay any tax on this portion of their income.
They can pass these savings to members in the form of higher dividends. The deduction encourages cooperative societies to continue their mission of providing goods and services to their members at competitive prices.
The taxation regulations in India enable profit-linked deductions to promote investment in designated industries. Incentive-based deductions encourage capital investments in critical sectors of national significance, including infrastructure, rural development, and education.
It is believed that such incentives will stimulate investment in the targeted sectors and generate more employment opportunities and economic stability.
Tax reliefs apply to the proceeds of certain industries including hospitality, small-scale manufacturing, housing schemes, export trading, and infrastructure advancement by Sections 80H to 80RRB. One such section relates to deductions concerning the income of cooperative societies, which S. 80P governs.
In this article, we will discuss one of the main incentives for setting up a cooperative society: the deduction under section 80P of the Income Tax Act. So, if you consider setting up a cooperative society, ensure you understand the deductions available under this section.
S.80P of the Income Tax Act provides a deduction from a cooperative society’s gross total income. This deduction is available to all cooperative societies, including farmers’ and consumer cooperative societies.
The purpose of this provision is to encourage individuals to come together to create a cooperative society. This will benefit the wider community, support the economy, and create employment opportunities for the locals.
The deduction is available for cooperatives primarily engaged in agriculture, industry, or trade and commerce. It is also applicable for those involved in providing services, as long as the profits generated are reinvested in society.
It helps to strengthen the country’s economy by encouraging cooperative societies to invest in infrastructure and services. This, in turn, helps create jobs and wealth long-term. This provision is essential to the government’s efforts to promote cooperative societies, which are integral to national economic growth and development.
A cooperative organization does not have a specific definition as per S.80. However, per Section 2(19) of the Income Tax Act, 1961, a cooperative society is defined as
As per S. 80P of the Income Tax Act, 1961, consumer cooperative societies are allowed a deduction of up to ₹1 lakh. Furthermore, depending on the activities of the cooperative society, they would be eligible for a tax deduction of 100% of the profits and gains or income.
If a cooperative society is engaged in activities other than those specified, it would be eligible for a deduction of up to ₹50,000. To qualify for this deduction, the cooperative society must be registered under the Cooperative Societies Act, 1912, or any other corresponding law in any state.
Certain exclusions to the application of a deduction benefit under S.80P were made by the Finance Act of 2006.
Any cooperative bank (including Regional Rural Banks) that is not
It is now exempt from being incentivized under S.80P. To treat cooperative banks equally with commercial banks, which do not receive this tax benefit, the benefit of this deduction has been removed.
Before you can claim a deduction under S. 80P, there are a few documents you need to have in order. First and foremost, you need to have
So, ensure you are prepared with all this paperwork before filing for a deduction under S. 80P.
To comply with tax provisions under Section 80P of the Income Tax Act, 1961, an individual or business entity must understand the guidelines and conditions set out by the Income Tax Department.
By following these guidelines, an individual or business entity can ensure adherence to the tax provisions under S.80P of the tax act.
While Section 80P of the Income Tax Act is a beneficial exemption for cooperative societies, a few common misconceptions need to be cleared up.
For starters, it is essential to note that this deduction only applies to income generated from the day-to-day operations of the cooperative society. It does not extend to income from non-cooperative sources, meaning that if the society derives income from renting out a property or from any other source unrelated to its primary activities, then it cannot avail of this deduction.
The deduction is also limited only to the business’s net profits and does not apply if the society has incurred a loss in any financial year. In addition, while this deduction can be claimed in all kinds of cooperative societies, there are certain kinds of cooperative societies whose profits may be completely exempted without any tax liability, without having to claim Section 80P.
Apart from this, there is a need to ensure that the contributions made by the members are for the benefit of society and not for personal gain. Also, all payments need to be accounted for and documented. Most importantly, avoid making any payments to members that are not following the rules and regulations of the cooperative society.
No, if the cooperative society is not engaged in activities related to agriculture or business, it may not qualify for this tax deduction.
For a consume-cooperative society, the maximum allowable deduction is up to ₹1,00,000 and, in all other cases, the maximum deduction is capped at ₹50,000.
Income tax will not be required to be paid by an individual who is a part of a cooperative society concerning any dividends they have received.
Under Section 44AA cooperative societies are required to maintain books of accounts, records and other financial documents for taxation. Additionally, these societies must have their accounts audited by a Chartered Accountant as per Section 44AB.
The Finance Act of 2020 introduced Section 115BAD to provide cooperative societies with the benefit of reduced taxation. This allows them to be taxed at a rate of 22% plus an additional 10% surcharge and 4% cess.
To avail of this benefit, these societies must forgo various income tax exemptions and deductions, such as those provided under Section.
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 5+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.
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