Section 80P Of the Income Tax Act: Deduction for Cooperative Societies
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.
Key Features of the Tax Provision u/s 80P
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.
Activities eligible for deduction
- Section 80P allows for a 100% deduction of the profit and gains when engaged in the following activities:
- A cooperative society that conducts banking operations or offers credit facilities to the society’s members.
- A cooperative society practises cottage industry.
- A cooperative association that markets the agricultural products that its members grow.
- To provide its members with agricultural products, including seeds, cattle, and other items, the cooperative organization procured these items.
- A cooperative society that processes its members’ agricultural products without the need for power.
- The labour of its members is disposed of collectively by cooperative societies.
- Cooperative societies offer fishing or related activities. Fish catching, curing, processing, storage, selling, and even acquiring materials and equipment connected to it are examples of linked operations.
- A primary society that supplies products like milk, oilseeds, fruits, and/or vegetables is a cooperative society. These goods are produced by the cooperative society’s members and supplied to the groups of people listed below:
- The Federal Cooperative Society, which is in the business of producing the goods mentioned above;
- The government or local authority;
- The Government Company, a corporation involved in supplying the goods mentioned above.
Deductions that can be claimed:
- Deduction for revenue from any other activity: For any other activity, a deduction of up to ₹1,00,000 is allowed for consumer cooperative societies, and up to ₹50,000 is permitted in all other cases.
- Deduction for interest income: A deduction is possible for interest or dividend income that the cooperative society receives due to investments in other cooperative societies. In this situation, the total amount of interest income may be deducted.
- Deduction for specific revenue: Deduction for income from renting out warehouses or godowns to store, process, or facilitate the marketing of goods. Income from all such activities is eligible for deduction.
Eligibility of Cooperative Societies u/s 80P
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
- An association registered under the Cooperative Societies Act, 1912 or
- Any other law applicable to the registration of such entities in any given state.
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.
Exclusions u/s 80P
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
- A primary agricultural credit society (as defined in the Banking Regulation Act) or
- A primary cooperative agricultural and rural development bank (This means a society having its area of operation confined to a taluka and the principal object of which is to provide long-term credit for agricultural and rural development activities)
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.
Documents Required for Deductions u/s 80P
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
- The full list of members in the cooperative society. This will usually include the name, PAN number (if they are above 18 years of age or more), date of birth and ID proof of each member.
- Besides this, you will also need to produce copies of all receipts and invoices related to income earned by the cooperative society during the financial year.
- You may also be asked to show records of any payments made to the members during this period.
- Additionally, depending on your state laws, you may also need documents like a Certificate of Registration, audited balance sheet and profit & loss account statement (for some societies).
So, ensure you are prepared with all this paperwork before filing for a deduction under S. 80P.
How to comply with tax provisions u/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.
- The entity must be a cooperative society registered under the Cooperative Societies Act, 1912. The entity must be engaged primarily in banking, lending, insurance or marketing agricultural produce.
- The entity must ensure that the profits and gains generated from the business activities are utilized for the benefit of its members.
- The entity must submit an audited financial statement of its income and expenditure to the Income Tax department within the prescribed time.
- The entity should also be aware of any deductions or exemptions available under this provision.
- Additionally, taxpayers should ensure that they keep accurate records of all activities affecting their eligibility for deductions or exemptions.
- Taxpayers should know the deadlines for filing taxes and paying applicable taxes.
- They should review their tax returns regularly to ensure it complies with all applicable tax provisions.
By following these guidelines, an individual or business entity can ensure adherence to the tax provisions under S.80P of the tax act.
Common errors to avoid while complying with S.80P
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.
Examples with the context for salaried employees
- The Income Tax Act does not provide any specific provision related to the taxability or non-taxability of income of members of a cooperative society.
- Section 80P of the Act lays out the deductions available to a cooperative society, but does not discuss the taxation of its members.
- In such cases, the cooperative society members are subject to the same taxation rules as any other individual.
- Taxability depends on the source of income and the applicable tax rules.
- The cooperative society members can consult a tax professional to understand the taxation rules applicable to an individual.
Frequently Asked Questions
Does tax deduction under S.80P apply to all types of cooperative societies?
No, if the cooperative society is not engaged in activities related to agriculture or business, it may not qualify for this tax deduction.
What is the maximum amount of deduction allowed?
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.
Are members subject to taxation on dividends received from cooperative society?
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.
Are cooperative societies required to record their financial transactions?
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.
What is the rate of taxation prescribed in Section 115 BAD of the Income Tax Act?
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.