Understanding Legal and Tax Compliances for Churches

For a long time, churches in India were able to operate with minimal formalities, opening bank accounts without having their own PAN card, often using the personal PAN of a pastor or member.

However, times have changed. Today, both churches and NGOs are under increased scrutiny by government authorities.

It has therefore become crucial for every church to stay compliant with legal and tax regulations, not only to protect its integrity but also to ensure transparency and accountability before the law.

With proper documentation and compliance, a church can remain protected at all times. In many situations, churches do not receive clear or accurate guidance on legal and financial compliance matters, leading to confusion and vulnerability.

As a result, many churches remain unaware of their actual legal standing and obligations.

This article aims to help church leaders and administrators understand the basic and essential compliances required under Indian law. Hoping that this would bring clarity and serve as a simple guide for churches to follow the right steps.

1. Legal Status of the Church

a. Type of Registration

It is strongly advisable that every church be formally registered either as a Charitable Trust or under the Societies Registration Act, depending on its governance and local framework.
Given the communal and organized nature of most churches, registration as a Society is usually more suitable.

Recommendation: Register under the Societies Registration Act.

b. Registration under Section 12A/12AB (Very Important)

It is mandatory for every church to obtain registration under Section 12AB of the Income Tax Act in order to claim income tax exemption.

Without this registration, all donations and offerings will be treated as taxable income and taxed as per normal slab rates.

2. Use of Donations

a. Application of Income

Once registered under Section 12AB, the church must ensure that at least 85% of its total income, including voluntary donations, is used for religious or charitable purposes during the financial year,  as per Section 11(1)(a) of the Income Tax Act.

Rule: Apply at least 85% of income towards the objectives of the church.
Note: Rest 15% can be carried over for the next 5 years.

b. Unspent Income

If the church is unable to spend 85% of its income during a financial year, it must:

• File Form 9A to carry forward the unspent amount to the next year, or
• File Form 10 if funds are set aside for a specific purpose (e.g., construction or capital expenditure).

Note: Failure to comply may result in the entire income being treated as taxable. 

3. Source and Documentation of Donations

a. Traceability of Donations

Even though religious organizations registered under Section 12AB are not required to collect donor details, it is advisable to maintain proper records for transparency.
All donations, whether in cash or online, should be recorded and accounted for properly. Such as name, address, contact information and adhaar (if available)

b. PAN Requirements

If the church does not hold 80G registration, it can receive donations without collecting donor PAN details (subject to Section 115BBC restrictions).

However, if the church is registered under Section 80G to offer tax benefits to donors, it must collect and report:

• Donor’s Name and Address
• PAN details (for donations above ₹2,000)
• Mode of payment
• Purpose of donation

This must be reported annually through Form 10BD. 

c. Foreign Donations

If the church receives funds from foreign donors, it must obtain FCRA registration (Foreign Contribution Regulation Act).
Receiving foreign funds without FCRA registration is illegal and can lead to:

• Seizure of funds
• Cancellation of registration
• Prosecution or penalties

4. Income Tax and Audit Compliance

a. Income Tax Return (ITR-7)

Every church claiming exemption under Sections 11 and 12 must file its annual return using Form ITR-7.
This is mandatory for all registered churches.

b. Audit Requirements

If the total income of the church exceeds ₹2.5 lakh in any financial year, it must:

1. Maintain proper books of accounts.
2. Get accounts audited by a Chartered Accountant.
3. File the Audit Report (Form 10B) along with the ITR.

Failure to comply may result in loss of exemption and taxation of the entire income.

5. Donor Benefits under Section 80G

a. Eligibility for Donor Deduction

If the church wishes to provide tax benefits to donors, it must apply for registration under Section 80G of the Income Tax Act.

b. Receipt Requirements

The church must issue proper receipts to donors, containing:

• Donor’s Name and PAN
• Amount donated
• Mode of payment
• Purpose of donation
• 80G certificate reference number

c. Annual Reporting

All 80G donations must be reported annually by filing Form 10BD, and donors should be issued Form 10BE to claim their tax deductions.

6. Special Case: Online Tithes and Offerings

With the rise of digital payments, many churches now receive offerings online. When doing so, it’s important to:

• Ensure all digital donations are traceable (name of donor, address, transaction ID, date, amount, amound paid for, payment mode).
• Collect donor details if 80G benefits are being offered.(PAN Card)
• If not registered under 80G, anonymous donations are allowed (within limits under Section 115BBC).
• Always maintain transparency for audit and accountability purposes.

Summary Recommendations

Mandatory Steps:

1. Register the church as a Society (or Trust, as applicable).
2. Obtain Section 12AB registration for income tax exemption.
3. File ITR-7 and Form 10B (if income > ₹2.5 lakh).
4. Apply at least 85% of income to charitable or religious purposes.
5. File Form 9A/10 if income is carried forward.

Optional but Beneficial:
6. Apply for Section 80G registration (for donor benefits).
7. Obtain FCRA registration (if foreign funds are received).

Conclusion

Proper compliance not only safeguards the church from legal or tax complications but also builds trust among donors, financial institutions, and the community.

By maintaining proper documentation and transparency, churches can ensure their ministry remains above reproach -focused on faith, service, and integrity.