Co-operative societies play a pivotal role in fostering social and economic well-being, particularly in rural and agricultural sectors. To encourage the growth of co-operative societies and promote their contribution to economic development, the Income Tax Act, 1961, provides specific tax exemptions under Section 81. These exemptions are designed to ease the tax burden on co-operatives engaged in various business activities, especially those related to agriculture, rural banking, and community welfare.
In this blog, we will explore Section 81 of the Income Tax Act, its scope, and the exemptions it offers to co-operative societies. By understanding these provisions, co-operative societies can maximize their tax savings while ensuring compliance with tax laws.
What is Section 81 of the Income Tax Act?
Section 81 of the Income Tax Act grants income tax exemptions to co-operative societies engaged in certain specified activities. These exemptions are aimed at reducing the tax burden on co-operatives involved in the banking sector, agriculture, and other community-benefiting activities. The section specifically outlines the types of income that are exempt from tax and the conditions under which these exemptions apply.
Tax Exemptions for Co-operative Societies under Section 81
The exemptions under Section 81 can be categorized based on the type of co-operative society and the nature of the activities they perform. Let’s take a closer look at the key provisions.
1. Exemptions for Co-operative Societies Engaged in Specified Activities (Clause i)
A co-operative society is exempt from paying income tax on the profits and gains arising from its business if it engages in any of the following activities:
- Banking or Credit Facilities: Co-operative societies that provide banking services or offer credit facilities to their members are eligible for tax exemptions on the profits derived from these services.
- Cottage Industry: Societies involved in cottage industries, typically small-scale industries operating from home or a small workshop, are also exempt from tax.
- Marketing of Agricultural Produce: Co-operatives that assist their members in marketing agricultural produce are exempt from income tax on profits from these marketing activities.
- Supply of Agricultural Implements: Societies that purchase and supply agricultural implements, seeds, livestock, or other agricultural-related articles to their members can claim tax exemptions on their profits.
- Processing of Agricultural Produce: Co-operative societies that process the agricultural produce of their members without the use of power are also eligible for tax exemption. This includes processing methods like hand threshing or natural drying.
- Primary Milk Supply Societies: A primary co-operative society that supplies milk, produced by its members, to a federal milk co-operative society is exempt from tax.
Proviso to Clause (i):
If a co-operative society engages in activities other than those mentioned above, it can still claim the tax exemption, but only for the part of its profits attributable to the specified activities. However, the total profits attributable to these specified activities should not exceed Rs. 15,000.
2. Exemption for Other Co-operative Societies (Clause ii)
For co-operative societies that do not fall under the categories mentioned in Clause (i), the first Rs. 15,000 of their business profits are exempt from income tax. This provision ensures that smaller co-operative societies engaged in other business activities also benefit from tax relief.
3. Exemption on Interest and Dividends from Other Co-operative Societies (Clause iii)
Co-operative societies often invest in other co-operatives. Under Section 81, any interest or dividends earned from investments made with other co-operative societies are tax-exempt. This helps in encouraging inter-cooperative collaboration and investment.
4. Exemption on Income from Letting of Godowns or Warehouses (Clause iv)
Co-operative societies that let out godowns or warehouses for storage, processing, or facilitating the marketing of commodities are exempt from tax on the income derived from such activities. This exemption is particularly beneficial for co-operatives engaged in the agricultural sector, as it allows them to manage and store commodities more effectively without facing a tax burden.
5. Exemption on Interest from Securities and Property Income (Clause v)
A co-operative society is exempt from tax on:
- Interest on Securities: Income derived from interest on securities chargeable under Section 18 of the Income Tax Act.
- Property Income: Income from property chargeable under Section 22 of the Income Tax Act, provided the total income of the co-operative society does not exceed Rs. 20,000.
This exemption, however, does not apply to housing societies, urban consumer societies, societies engaged in transport, or societies engaged in manufacturing with the aid of power.
Exclusion for Co-operative Societies Engaged in Insurance Business
It’s important to note that co-operative societies engaged in insurance business do not qualify for the exemptions listed under Section 81. The profits and gains derived from insurance business operations must be computed in accordance with Section 44 of the Income Tax Act, which deals with the taxation of insurance companies.
Definition of “Urban Consumer’s Co-operative Society”
For the purpose of Section 81, the term “Urban Consumer’s Co-operative Society” refers to a society that serves consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area, or cantonment. These societies, while serving urban populations, are excluded from some of the exemptions provided to other co-operatives.
FAQs
Q1. What is Section 81 of the Income Tax Act?
Section 81 provides tax exemptions for co-operative societies engaged in specific activities, such as banking, agriculture, and processing of agricultural produce without the use of power.
Q2. Are co-operative societies engaged in manufacturing with the aid of power eligible for exemptions under Section 81?
No, co-operative societies involved in manufacturing operations using power are not eligible for the exemptions under Section 81.
Q3. Can a co-operative society claim tax exemptions for activities beyond the specified ones?
Yes, a co-operative society can claim tax exemptions for specified activities, but only to the extent of profits attributable to those activities, and the total amount should not exceed Rs. 15,000.
Q4. Is income from godown or warehouse rental exempt under Section 81?
Yes, income derived from letting godowns or warehouses for storage, processing, or marketing of commodities is exempt from tax under Section 81.
For more detailed information on co-operative societies and tax exemptions, visit Smart Tax Saver.
Conclusion: Maximizing Tax Benefits for Co-operative Societies
Section 81 of the Income Tax Act provides substantial tax relief to co-operative societies involved in activities that benefit their members and the community. By understanding and leveraging these exemptions, co-operative societies can significantly reduce their tax liabilities while focusing on their core activities like rural banking, agriculture, and cooperative development.
If your co-operative society qualifies for these exemptions, it is essential to maintain proper records and ensure that your income from qualifying activities is accurately reflected in your tax filings. This will not only ensure compliance with the law but also maximize your tax savings.
