Any organisation working for a social, cultural,
economic, educational or religious cause is termed as an NGO.
NGOs have made favourable indents to needy sections of Indian
society at par with a constantly changing socio-economic climate.
NGOs have reached out to all sections of society including women,
children, pavement dwellers, unorganised workers, youth,
slum-dwellers and landless labourers.
An NGO can be formed under various legal
(i) Society registered under Societies Registration Act,
(ii) Trust (Formed under the Trust deed and
registered with Income Tax Authority.)
(iii) Limited company incorporated under section 25
of the Companies Act, 1956
A Society is formed when people come together to
do something with some common purpose which is legal and useful
for others. A society should generally not get into profit making
What is a Charitable Trust?
A Charitable trust is a legal entity which can be
set up by anyone who has decided to commit themselves in
principle to setting aside some of their assets or income for
Charitable causes. The main obligation is to work within the
charitable purposes and the powers set out in the Trust Deed.
Features of a Trust
A Trust is created when a donor attaches a legal
obligation to the ownership of certain property based on his
confidence placed in and accepted by the donee or trustee, for
the benefit of another.
The persons who intends to create the trust with
regard to certain property for a specified beneficiary or
beneficiaries at large and who places his confidence in another
for this arrangement is called the Author of the Trust; the
person who accepts the confidence is called the Trustee; the
person for whose benefit the confidence is accepted is called the
Beneficiary; the subject matter of the trust is called Trust
Charity is a matter for State control, so different
States of India have their own legislation in the form of Trusts
or Endowment Acts or even Societies Act to govern and regulate
public charitable NGOs.
Trustees control the Trust
The Trustees control the trust's assets and decide
how the income (and capital) of the trust is to be distributed,
and ensure that it is in line with the charitable purposes of the
The author of the trust must indicate with
reasonable certainty the following:
Intention to create trust
Purpose of the trust
Beneficiaries of the trust, and
The trust property
A public trust is of permanent and indefinite
character. A public trust benefits the public at large or at
least a section of the community.
The property forming subject matter of the trust
must be capable of being transferable to the beneficiary - thus
property which is inalienable by virtue of public policy or
statute does not form valid subject matter for a trust. In terms
of section 8 of the Indian Trusts Act, there cannot be as a trust
of a beneficial interest under a trust i.e. there cannot be a
trust upon a trust.
Flexibility in naming your Trust
You can choose what to call your trust - your family name, or
that of an honourable person. The organisation can also be called
a "foundation' or "charity' or any similar terms as these words
are practically interchangeable in a legal sense.
Advantages and Disadvantages of registration under
the Indian Trusts Act
The advantages and disadvantages related to NGOs
registered under the Societies Act are equally applicable to
i Simple process of registration;
ii Simple record-keeping and even simpler
iii Low possibility of interference by the
iv Exemption from tax due to charitable nature of
i Tax exemption extended to societies may apply to
public trusts only to the extent the Income Tax department
accepts their activities as being charitable.
ii. As a charitable institutional form, in essence
inappropriate for the for-profit, financially sustainable
strategic goal of finance operations;
iii No system of equity investment or ownership,
thereby, making it less attractive for commercial investors
interested in microfinance;
iv Commercial investors generally regard the
investments in such entities risky primarily on account of their
lack of professionalism and managerial practices and are,
therefore, reluctant to commit large volumes of funds to such
v In accordance with Section 45S of the RBI Act,
1934, no unincorporated bodies are allowed to accept deposits
from the public. Organisations registered under the Societies
Registration Act and the Trust Act are considered unincorporated
bodies. Therefore, according to the law, they are not even
allowed to collect savings from their clients; and
vi Also vulnerable to the implication under the
money lenders (prevention of usurious interest rates) acts of
various state governments.
NON - PROFIT COMPANY - is identical to an ordinary
company in all respects except that it is not established for
profit and commercial gain. It is also called a Section 25
Company and is a voluntary association of people, registered
under the Indian Companies Act, 1956.
Objectives of a non-profit company can include
promotion of commerce, art, science, religion, charity or any
other useful object. Profits are applied for promoting only the
objects of the company and no dividend is paid to its members
(Section 25 (1) (a) and (b) of the Companies Act, 1956). A
non-profit company may be public or private. If the non-profit
company is a private company a minimum of only two members are
required to form it. However, if the non-profit company is for a
public purpose, then a minimum of seven are needed. A 'section 25
company´ is eligible for certain exemption from provisions
of law and concessional rate of fees etc.
Section 11 of the Income Tax Act, exempts the
income of Charitable Societies / Trusts from the charge of tax on
the fulfilment of certain conditions. Apart from this, sections
12, 12A, 12AA and 13 and certain clauses of Section 10 of Income
Tax Act also govern the issue of taxation of such organisations.
However NGOs need to apply to the income tax authorities to get
For availing exemption under Section 11, the
Society / Trust is required to fulfil the following
a. Registration: For registration under Section
12AA with the Commissioner of Income Tax, the Society or Trust or
institutions should apply within one year from the date of
creation of Society or establishment of institution, in Form No
10A (in duplicate) along with the memorandum of association or
bye-laws of the society in original or the document evidencing
creation of the Trust, together with a copy thereof and two
copies of the accounts of the society relating to three previous
years (or for the year during which the Society or Trust was in
existence, in case of a new Society). The Commissioner shall call
for documents or information and hold enquiries regarding the
genuineness of the Society/ institution. After being satisfied
about the charitable or religious nature of its objects and
genuineness of its activities, he will pass an order granting
registration, and if he is not satisfied, he will pass an order
refusing registration, subject to the condition that an
opportunity of being heard shall be provided to the applicant
before an order of refusal to grant registration is passed and
the reasons for refusal of registration shall be mentioned in
such order. The order granting or refusing registration has to be
passed within six months from the end of the month in which the
application for registration is received and a copy of such order
shall be sent to the applicant society/institution. If the
Commissioner of Income Tax is satisfied that the activities of
any institution are not genuine or are not being carried out in
accordance with the objects of the institutions, he shall, after
giving reasonable opportunity of being heard to the concerned
institution, pass an order in writing cancelling the registration
granted under Section 12AA.
b. Maintenance of Accounts: The Society / Trust
should maintain regular books of account, supported by receipts
and vouchers. The accounts shall be made on a cash basis. The
Society / Trust should prepare an 'Income and Expense Account'.
Any voluntary contribution received by the Society / Trust shall
be deemed to be income derived from the property held under
trust. Where contribution have been made with a specific
direction that they shall form part of the corpus it should be so
specified on the receipt issued as the same shall be exempt under
section 11 (1)(d).
c. Compulsory Audit: Where the total income of the
Society / Trust /institution exceeds Rs 50,000 in any previous
year, the accounts of such Society / Trust are required to be
audited and the audit report which shall be in Form No 10B is
required to be furnished along with the return.
d. Income not to be spent for the benefit of
certain persons: No part of the income or property of a
Charitable Society / Trust claiming exemption under Section 11
should be used or applied for benefit of any person specified
under Section 13/3, subject to certain exceptions.
In the event of refusal to tax exemption, Societies
/ Trusts need to pay tax on their income, as per the terms laid
down in the Income Tax act. Societies / Trusts involved in
for-profit activities also pay tax as per the terms in the Income
Tax act. These tax paying Societies / Trusts can also make
investments in the for-profit ventures or bodies, based on their
Special Note on Section 2 (15) of the Income Tax
Under Section 2 (15) of the Income Tax Act,
'Charitable Purpose' includes:
Relief of the poor
Medical relief and
Advancement of any other object of general public
The Finance ministry has sought to amend the last
part of the above definition to provide that 'advancement of any
other object of general public utility' will not be considered as
'charitable purpose' if it involves carrying on of any activity
in the nature of trade, commerce or business or any activity of
rendering any service in relation to any trade, commerce or
business for any fee, cess or other consideration. If any such
activity is carried on by a trust, fund or institution, then such
an organization will not be entitled to any exemption under
section 11 and its income will be chargeable to tax even if
utilized for charity unless such trust is carrying on other
charitable activities and the trust is created prior to 1st
The most important point to note here is that the
proposed amendment will not affect organizations involved in
activities such as relief of the poor, medical relief and
It is important to note here that the restriction
on the activities of general public utility is only if:
The activity involves carrying on of any activity for a
fee/consideration or is in the nature of trade, commerce and
business or of rendering any service in relation to trade,
commerce or business.
"Charitable purpose includes relief of the poor,
education, medical relief and any other object of general public
utility. These activities are tax exempt, as they should be.
However, some entities carrying on regular trade, commerce or
business or providing services in relation to any trade, commerce
or business and earning incomes have sought to claim that their
purposes would also fall under "charitable purpose". Obviously,
this was not the intention of Parliament and, hence, the Finance
ministry has proposed to amend the law to exclude the aforesaid
cases. Genuine charitable organizations will not in any way be
It is also pertinent to note that the proposed
amendment does not target all the activities falling under
advancement of any other object of general public utility. Only
those which are 'commercial' or 'supporting commerce' are
affected. Thus research, livelihoods, child labour, environment,
women's rights, etc., are not covered as these are not in the
nature of commerce, trade or industry.
Organizations involved in Relief of poor, medical relief and
education may safely carry out income generating activities.
Micro finance for the poor, hostels run by educational
institutions or fees charged by medical institutions will not be
deemed as business. However trade organizations and associations
supporting commerce and industry will be affected by this
Also, rental income which is assessed under the head house
property is not business income.
Section 11(4A) of the Income Tax Act which permits
business which is incidental to charity has not been amended.
Section 11(4) which treat a business undertaking as a property
held under trust has also been left untouched. Hence, genuine
charitable organizations are not likely to be affected in any
Prior Permission always
The Foreign Contribution (Regulation) Act, 1976
(FCRA) requires all Indian NGOs that receive foreign
contributions to receive clearance from the Ministry of Home
Affairs, in the form of either permanent FCRA registration or
prior permission on a case-to-case basis.
The procedure for obtaining prior permission from
the FCRA is as follows:
1) Apply in Form FC - 1A
Applicant (s) to file Form FC - 1A along with required
2) Field Inquiry
Official from the Intelligence Bureau visits your main office,
may inspect accounts and ask questions can also visit the field
area, inquire at local police station and thereafter he prepares
confidential report to FCRA Department.
3) FCRA permission
Within 90 days thereafter, you will receive a registered letter
from the Department either granting the permission or stating
rejection of your request.
4) Appeal against rejection
You can re-apply after ascertaining and rectifying objections on
your file. You can also file an appeal in the High Court within
60 days of the date of letter.
5) Applying again
One party can apply for prior permission more then once if needed
- considering that projects are varied and or are under different
When FCRA permission is not needed:
Prior permission from the FCRA is not required for
receiving amounts in the following forms:-
(a) Salary, wages or other remuneration either to
individual or payment for business purposes.
(b) Payment for international trade or for business
transacted by him outside India.
(c) By way of a gift or presentation received as
member of any Indian delegation.
(d) Gift not exceeding Rs. 8,000/- per annum.
Profit-oriented organisations are not covered by
Bank Account for foreign funds
An NGO is required to open and use bank account exclusively for
foreign funds under FCRA.
Income Tax Benefits on foreign funds
Form FC-3 is to be filed at the end of each
financial year (by 31st July). Filing required to be done
annually till such time the FCRA funds are exhausted.
Documents to attach with Form FC-8 - Attach one
copy of each of the following documents
1. Certificate from the concerned District
Collector/Department of State Government/Ministry or Department
of Central Government;
2. Activity report for past three years;
3. Audited Statements of Account for past three
4. List of state or districts of focus of work;
5. Note on socio-economic background of the
beneficiaries and of the region to be covered;
6. Where NGO is a Society, attach a certified copy
of Registration Certificate issued by the Registrar of
7. Certified copy of registered Trust Deed (if NGO
is a Trust);
8. Certified copies of (a) Memorandum and Articles
of Association, (b) registration certificate issued by the
Registrar of Companies, (c) section 25 license issued by the
Regional Director, Department of Company Affairs (if NGO is a
9. FCRA does not allow mixing up of Indian funds
and FCRA funds. This means both funds are to be maintained