In India, non-profit / public charitable organisations can be registered as trusts, societies, or private

limited non-profit companies, under section 25 of the Companies Act. Non-profit organisations in India

(a) exist independently of the state;

(b) are self-governed by a board of trustees or ‘managing committee’/ governing council, comprising
individuals who generally serve in a fiduciary capacity;

(c) produce benefits for others, generally outside the membership of the organisation; and

(d), are ‘non-profit-making’, in as much as they are prohibited from distributing a monetary residual to
their own members.

Whether a trust, society or section-25 company, the Income Tax Act gives all categories equal
treatment, in terms of exempting their income and granting 80G certificates, whereby donors to non-
profit organisations may claim a rebate against donations made. Foreign contributions to non-profits are
governed by FC(R)A regulations and the Home Ministry.

I. Trusts

A public charitable trust is usually floated when there is property involved, especially in terms of land
and building.

Legislation : Different states in India have different Trusts Acts in force, which govern the trusts in the
state; in the absence of a Trusts Act in any particular state or territory the general principles of the
Indian Trusts Act 1882 are applied.

Main Instrument : The main instrument of any public charitable trust is the trust deed, wherein the aims
and objects and mode of management (of the trust) should be enshrined. In every trust deed, the
minimum and maximum number of trustees has to be specified. The trust deed should clearly spell out
the aims and objects of the trust, how the trust should be managed, how other trustees may be
appointed or removed, etc. The trust deed should be signed by both the settlor/s and trustee/s in the

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presence of two witnesses. The trust deed should be executed on non-judicial stamp paper, the value of
which would depend on the valuation of the trust property.
Trustees : A trust needs a minimum of two trustees; there is no upper limit to the number of trustees.
The Board of Management comprises the trustees.
Application for Registration :
The application for registration should be made to the official having jurisdiction over the region in
which the trust is sought to be registered.

II. Society

According to section 20 of the Societies Registration Act, 1860, the following societies can be registered
under the Act: ‘charitable societies, military orphan funds or societies established at the several
presidencies of India, societies established for the promotion of science, literature, or the fine arts, for
instruction, the diffusion of useful knowledge, the diffusion of political education, the foundation or
maintenance of libraries or reading rooms for general use among the members or open to the public, or
public museums and galleries of paintings and other works of art, collection of natural history,
mechanical and philosophical inventions, instruments or designs.’

Legislation : Societies are registered under the Societies Registration Act, 1860, which is a federal act. In
certain states, which have a charity commissioner, the society must not only be registered under the
Societies Registration Act, but also, additionally, under the Bombay Public Trusts Act.
Main Instrument : The main instrument of any society is the memorandum of association and rules and
regulations (no stamp paper required), wherein the aims and objects and mode of management (of the
society) should be enshrined.

Trustees : A Society needs a minimum of seven managing committee members; there is no upper limit
to the number managing committee members. The Board of Management is in the form of a governing
body or council or a managing or executive committee

Application for Registration :

Registration can be done either at the state level (i.e., in the office of the Registrar of Societies) or at the
district level (in the office of the District Magistrate or the local office of the Registrar of Societies).

The procedure varies from state to state. However generally the application should be submitted
together with: (a) memorandum of association and rules and regulations; (b) consent letters of all the
members of the managing committee; (c) authority letter duly signed by all the members of the
managing committee; (d) an affidavit sworn by the president or secretary of the society on non-judicial
stamp paper, together with a court fee stamp; and (e) a declaration by the members of the managing
committee that the funds of the society will be used only for the purpose of furthering the aims and
objects of the society.

All the aforesaid documents which are required for the application for registration should be submitted
in duplicate, together with the required registration fee. Unlike the trust deed, the memorandum of
association and rules and regulations need not be executed on stamp paper.

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III. Section-25 Company

According to section 25(1)(a) and (b) of the Indian Companies Act, 1956, a section-25 company can be
established ‘for promoting commerce, art, science, religion, charity or any other useful object’, provided
the profits, if any, or other income is applied for promoting only the objects of the company and no
dividend is paid to its members.

Legislation : Section-25 companies are registered under section-25 of the Indian Companies Act, 1956.

Main Instrument : For a section-25 company, the main instrument is a Memorandum and Articles of
Association (no stamp paper required)

Trustees : A section-25 Company needs a minimum of three trustees; there is no upper limit to the
number of trustees. The Board of Management is in the form of a Board of directors or managing
committee.

Application for Registration :

1. An application has to be made for availability of name to the registrar of companies, which must be
made in the prescribed form no. 1A. It is advisable to suggest a choice of three other names by which
the company will be called, in case the first name which is proposed is not found acceptable by the
registrar.

2. Once the availability of name is confirmed, an application should be made in writing to the regional
director of the company law board. The application should be accompanied by the following documents:
Three printed or typewritten copies of the memorandum and articles of association of the proposed
company, duly signed by all the promoters with full name, address and occupation.

A declaration by an advocate or a chartered accountant that the memorandum and articles of

association have been drawn up in conformity with the provisions of the Act and that all the
requirements of the Act and the rules made thereunder have been duly complied with, in respect of
registration or matters incidental or supplementary thereto.

Three copies of a list of the names, addresses and occupations of the promoters (and where a firm is a
promoter, of each partner in the firm), as well as of the members of the proposed board of directors,
together with the names of companies, associations and other institutions in which such promoters,
partners and members of the proposed board of directors are directors or hold responsible positions, if
any, with description of the positions so held.

A statement showing in detail the assets (with the estimated values thereof) and the liabilities of the
association, as on the date of the application or within seven days of that date.
An estimate of the future annual income and expenditure of the proposed company, specifying the
sources of the income and the objects of the expenditure.

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A statement giving a brief description of the work, if any, already done by the association and of the
work proposed to be done by it after registration, in pursuance of section-25.

A statement specifying briefly the grounds on which the application is made.

A declaration by each of the persons making the application that he/she is of sound mind, not an
undischarged insolvent, not convicted by a court for any offence and does not stand disqualified under
section 203 of the Companies Act 1956, for appointment as a director.

3. The applicants must also furnish to the registrar of companies (of the state in which the registered
office of the proposed company is to be, or is situate) a copy of the application and each of the other
documents that had been filed before the regional director of the company law board.

4. The applicants should also, within a week from the date of making the application to the regional
director of the company law board, publish a notice in the prescribed manner at least once in a
newspaper in a principal language of the district in which the registered office of the proposed company
is to be situated or is situated and circulating in that district, and at least once in an English newspaper
circulating in that district.

5. The regional director may, after considering the objections, if any, received within 30 days from the
date of publication of the notice in the newspapers, and after consulting any authority, department or
ministry, as he may, in his discretion, decide, determine whether the license should or should not be
granted.

6. The regional director may also direct the company to insert in its memorandum, or in its articles, or in
both, such conditions of the license as may be specified by him in this behalf.

IV. Special Licensing

In addition to registration, a non-profit engaged in certain activities might also require special
license/permission. Some of these include (but are not limited to):

A place of work in a restricted area (like a tribal area or a border area requires a special permit – the
Inner Line Permit – usually issues either by the Ministry of Home Affairs or by the relevant local
authority (i.e., district magistrate).

To open an office and employ people, the NGO should be registered under the Shop and Establishment
Act.

To employ foreign staff, an Indian non-profit needs to be registered as a trust/society/company, have

FCRA registration and also obtain a No Objection Certificate. The intended employee also needs a work
visa.

A foreign non-profit setting up an office in India and wanting staff from abroad needs to be registered as

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a trust/society/company, needs permission from the Reserve Bank of India and also a No Objection
Certificate from the Ministry of External Affairs.

Comparision among Trust, Society and Non-profit Company

Trust Society Section-25 Company

Statute/Legislation Relevant State Trust Act Societies Registration Indian Companies
or Bombay Public Trusts Act, 1860 Act, 1956
Act, 1950
Jurisdiction Deputy Registrar of Societies Registrar of
Registrar/Charity (Charity Commissioner in companies
Commissioner Maharashtra).
Registration As Trust As Society As a Company u/s 25
In Maharashtra, both as a of the Indian
society and as a trust Companies Act.
Registration Trust Deed Memorandum of Memorandum and
Document Association and Rules Articles of
and Regulations Association. and
Regulations
Stamp Duty Trust deed to be No stamp paper required No stamp paper
executed on non- for memorandum of required for
judicial stamp paper, association and rules and memorandum and
vary from state to state regulations. articles of
association.
Members Required Minimum – two Minimum – seven Minimum three
trustees. No upper limit. managing committee trustees. No upper
members. No upper limit. limit.
Board of Trustees / Board of Governing body or Board of directors/
Management Trustees council/managing or Managing
executive committee committee
Mode of Succession Appointment or Appointment or Election Election by members
on Board of Election by members of the of the general body
Management general body

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 INTER-CHARITY DONATIONS

DONATION TO ANOTHER CHARITABLE ORGANISATION IS APPLICATION : It has been held in various

cases that donation made by one Charitable Organisation to another shall be considered as
application of income for the objectives of the organisation provided the donee organisation also has
objects similar to the object donor organisation.

DONATIONS TO OTHER CHARITABLE INSTITUTIONS AFTER 1-4-2002 : The Finance Act, 2002 has
inserted an Explanation to sub-section (2) of section 11. This Explanation prohibits donations to other
Charitable Organisations out of the accumulated funds. This amendment can have far-reaching
practical implications. The new amendment puts restriction on donations to other charities only out
of accumulated funds. In other words, funds once accumulated under section 11(2) can only be
applied for charitable purposes directly by the concerned organisation and any inter-organisational
transfer would not be possible.

DONATION OUT OF CURRENT INCOME IS NOT BANNED : However inter-organisational donations

are possible from current year’s income, but the newly amended provision will certainly create
hurdles for organisations, which were used as conduct for channel rising funds to other
organisations. The new Explanation inserted by the Finance Act, 2002, to section 11(2) has debarred
organisations from applying its accumulated or set-apart income by way of payment or credit to
other such organisations. Now, payments or credits out of accumulated funds to any other
organisation would not be treated as application for charitable or religious purpose. There is no
apparent bar on payment or credit to such other organisations out of previous year’s income subject
to the provisions of section 11(1).

In the light of the above, funds once accumulated are no longer available for credit or payment to
any other Charitable Organisation, though such transfer may still be possible out of the current year’s
income under section 11. CBDT has also issued a clarificatory circular no. 8, dt. 27.08.2002.

In the light of the aforesaid and the amendments by virtue of Finance Act, 2002, donations to other
Charitable Organisation are still possible but only out of the current years income. Once the funds are
accumulated then it will not be permissible to make inter-trust donation and treat them as
application.

AMENDMENT IN FINANCE ACT, 2003 : The Finance Act, 2003 has inserted another proviso to sub-
section (3A) of section 11 which provides that inter-charity donation out of accumulated funds will be
permissible in case of dissolution of a Charitable Organisation. This amendment has been made to
reduce the hardship of Charitable Organisations on the brink of dissolution.

TAX PLANNING THROUGH DEEMED APPLICATION : In the light of what is discussed in this chapter,
the amended provisions with regard to inter-charity donations will cause hardship to those
organisations which act as a mother NGO to many small charitable organisations and funds through
various foreign and domestic sources are routed through them. Many donors prefer to fund through
one mother NGO which subsequently distributes the funds to smaller NGOs. After the amendment
made in 2002 there is an apprehension in the fraternity of Charitable Organisations, that it may

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 become difficult to disburse funds received towards the end of the year. And since accumulated
income is not available for inter-charity donations, the funds could neither be applied nor could be
donated to other charities.

For instance if a Charitable Organisation receives funds in the month of March - which is required to
be distributed to other charitable Organisations - and is unable to make inter-charity donations
within the year of receipt, then it has to accumulate the same. Once the income is accumulated
under section 11(2) then it is not permissible to make inter-charity donations.

Under the above mentioned circumstances, a Charitable Organisation may exercise the option
available under Explanation to section 11. The Explanation to the section 11 refers to two situations
where the income applied falls short of 85% and still can be deemed to have been applied in the
previous year. Under the second situation, the assessee may exercise its option by applying in writing
before the expiry of the time allowed under section 139(1) for filing of return. After exercise of the
option, the income will be deemed to have been applied in the previous year even though it is spent
in the succeeding or the year of receipt.

Inter-charity donations being valid application of income, there is no reason why option under
Explanation 2 to section 11(1) could not be applied and the income be actually spent/disbursed in
the succeeding year. But the reasons have to be genuine, the organisation must have valid reasons
for not being able to apply the income as inter-charity donations.

OVERALL SUMMARY

To sum up the discussions :

i) Donation to another charity with similar objects is considered as an application of income for
charitable or religious purposes.

ii) CBDT Instruction No.1132 (1978), has clarified that if the donee organisation does not utilise in the
year of receipt, then the exemption to donor will not be affected.

iii) The Assessing Officer should be satisfied that the donation is a bonafide initiative and would be
used by the donee for charitable purposes only. In other words, unqualified benefit to the donor is
not available.

iv) High Courts have held that even inter-charity donations towards corpus is a valid application. But
this contention may require re-consideration.

v) After 01.04.2002, inter-charity donation out of accumulated funds is not possible except in the
case of dissolution of the donor organisation.

vi) Organisations receiving funds towards the end of the year can still make inter-charity donations
by applying the option under Explanation to section 11.

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 INCOME TAX - PRIVILEGES TO THE DONORS U/S 80G

INTRODUCTION

As we already know that an NGO can avail income tax exemption by getting itself registered and
complying with certain other formalities, but such registration does not provide any benefit to the
persons making donations. The Income Tax Act has certain provisions which offer tax benefits to the
"donors". All NGO's should avail the advantage of these provisions to attract potential donors.
Section 80G is one of such sections.

REGISTRATION UNDER SECTION 80G

If an NGO gets itself registered under section 80G then the person or the organisation making a
donation to the NGO will get a deduction of 50% from his/its taxable income. The NGO has to apply
in Form No. 10G As per Annexure - 29 to the Commissioner of Income Tax for such registration.
Normally this approval is granted for 2-3 years.

DOCUMENTS TO BE FILLED WITH FORM 10G

The application form should be sent in triplicate to the Commissioner of Income Tax alongwith the
following documents :

i) copy of income tax registration certificate.

ii) detail of activities since its inception or last three years whichever is less
iii) copies of audited accounts of the institution/NGO since its inception or last 3 years whichever is
less.

CONDITIONS TO BE FULFILLED UNDER SECTION 80G

For approval under section 80G the following conditions are to be fulfilled :

i) the NGO should not have any income which are not exempted, such as business income.
If, the NGO has business income then it should maintain separate books of accounts and
should not divert donations received for the purpose of such business.

ii) the bylaws or objectives of the NGOs should not contain any provision for spending the
income or assets of the NGO for purposes other than charitable.

iii) the NGO is not working for the benefit of particular religious community or caste.

iv) the NGO maintains regular accounts of its receipts & expenditures.

v) the NGO is properly registered under the Societies Registration Act 1860 or under any
law corresponding to that act or is registered under section 25 of the Companies Act
1956.

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 EXTENT OF BENEFIT

There is ceiling limit upto which the benefit is allowable to the donor.

If the amount of deduction to a charitable organisation or trust is more than 10% of the Gross
Total Income computed under the Act (as reduced by income on which income-tax is not payable
under any provision of this Act and by any amount in respect of which the assessee is entitled to
a deduction under any other provision of this Chapter), then the amount in excess of 10% of
Gross Total Income shall not qualify for deduction under section 80G.

In other words, while computing the total income of an assessee and for arriving at the
deductible amount under section 80G, first the aggregate of the sums donated has to be found
out. Then 50 per cent of such donations has to be found out and it should be limited to 10 per
cent of the gross total income. If such amount is more than 10 per cent of the gross total income,
the excess will have to be ignored.

IILUSTRATION OF BENEFITS UNDER SECTION 80G

The persons or organisation who donate under section 80G gets a deduction of 50% from their
taxable income. Here at times a confusion creeps in, that the tax advantage under section 80G is
50%, but actually it is not so. 50% of the donation made is allowed to be deducted from the
taxable income and consequently tax is calculated.

The ultimate benefit will depend on the tax rates applicable to the assessee. Let us take an
illustration. Mr. X an individual and M/s. Y Pvt. Ltd., a Company both give donation of Rs.
1,00,000/- to a NGO called Satyakaam. The total income for the year 2003-2004 of both Mr. X
and Ms. Y Pvt. Ltd. is Rs. 2,00,000/-. Now assuming that the rates are 30% for the individuals and
40% for the Companies without any minimum exemption limit. The tax benefit would be as
shown in the table :

MS. Y Pvt.
Mr. X
Ltd.
i) Total Income for the year 2003-2004 2,00,000.00 2,00,000.00
ii) Tax payable before Donation 60,000.00 80,000.00
iii) Donation made to charitable organisations 1,00,000.00 1,00,000.00
iv) Qualifying amount for deduction (50% of donation made) 50,000.00 50,000.00
v) Amount of deduction u/s 80G (Gross Qualifying Amount subject
20,000.00 20,000.00
to a maximum limit 10% of the Gross Total Income)
iv) Taxable Income after deduction 1,80,000.00 1,80,000.00
v) Tax payable after Donation 54,000.00 72,000.00
vi) Tax Benefit U/S 80G (ii)-(v) 6,000.00 8,000.00

Note : The tax rates and mode of computation is not actual

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