Understanding NGO Registration in India and other Important Financial Information

The word NGO in India refers to an entity that remains once Government and Business are removed from the framework. These entities work towards the general betterment of the society and function as small units which fill the gaps at places where Government can’t reach effectively and business cannot be done with meaningful returns.

The term Non Government Organization or NGO is used as an umbrella to cover all legal entities that seek charitable and philanthropic funds towards betterment of society without the motive to derive profit from it. However there is no such legal entity as a NGO. It can either be a Trust, a Society or a Section 25 Company. It is important that we understand the legal framework of an NGO and the important tax benefits available to an NGO.

To start with let us understand the key features of Non Profit Organizations in India.

• They are independent of the state.
• These are self governed by a board of trustees, governing council or group of individuals
• Main objective is towards betterment of the society and wellbeing of the community at large.
• Profit generation is not their principal goal.
• They impact education, arts, poverty, medicine, environment and other areas that are not sustainable through a for-profit business model.
• Exist as a trust, society or a section 8 company.

The guide has two sections, the first section deals with registration procedures while the second section talks about important tax related regulations.

Registration of a NGO

There are three ways through which a NGO can register itself as a legal entity in India;

1. Trust
2. Society
3. Section 8 Company (same as section 25 Company under Indian Companies act 1956)

TRUST: Trust is defined in section 3 of the Trust Act, 1882 as ” an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another or of another and the owner. To put it in simpler words a trust is the safe keeper of a property for the transfer of a property by the owner to another for the benefit of a third person along with or without himself or a declaration by the owner, to hold the property not for him but for the other.

Trusts are created when the settler of the property transfers property or provides benefits for the welfare of beneficiaries or for the usage of public purposes. A trust formed with the aim to utilize the assets of the Trust to attain well being of public at large and promote a charitable cause is called a Public Charitable trust. Such trust do not have a fixed beneficiary, but the public in large, generally demarcated with common trait. E.g. for a Public trust located in a city the beneficiary may be the illiterate kids in the slums of the city.

Different states in India have different Trusts Acts in force, which govern the trusts in that particular state. In case a state does not have a Trusts Act, the general principles of the Indian Trusts Act 1882 are applied. The other relevant acts are Religious Endowment Act, 1863, Charitable & Religious Trust Act, 1920 and The Bombay Public Trust Act, 1950. A Trust deed needs to be made by the Author for the creation of a Trust. It can be then registered under any of the Trust Act being practiced in the State. Commonly registration under Indian Trust Act of 1988 is recommended and practiced.

The following are the Major elements of the trust;

• Author or Settler: One who forms the trust and transfers under irrevocable arrangement the property and its future benefits to the trust.
• Trustee: A body of Individuals who undertake the management and safekeeping of Trust and its property.
• Beneficiary: People who will benefit from the trust.
• Asset or property
• Objective of the Trust
• Trust Deed, defining all relationships, responsibilities, rights, terms and conditions.

Society: In India a Society is registered under the Societies Registration Act 1860. A society is a group of individuals who have come together to pursue a common cause. As per the Act “Societies formed by memorandum of association and registration.—Any seven or more persons associated for any literary, scientific, or charitable purpose, or for any such purpose as is described in section 20 of this Act, may, by subscribing their names to a memorandum of association, and filing the same with the Registrar of Joint-stock Companies form themselves into a society under this Act”.

A society has a Memorandum of Association and Rules and Regulation. Unlike a Trust which is executed on a stamp paper, these can be taken out on a simple A4 pages. However a Society needs to be registered with the Registrar of Society, duly appointed by the State Government. The society can be formed by a minimum of seven People. These members form the governing body by electing few of them to posts such as President, Secretary, Treasurer etc. The governing body undertakes the day to day management of the trust. Election of governing body is usually an annual process. A Society can easily alter its MOA and increase or decrease its scope of work.

If one wishes to form a society that can work across India, it should have at least 8 members, 5 of which are from different states. This is not required for a Trust. Members can be added in a society as and when required. A list of members signed by governing body suffices as proof. Special attention needs to be given to the MoA while forming a society as it forms the most important document of a society. Make sure that the objectives are exhaustive to avoid complication in future. Changes in MOA need to be approved by the registrar of firm.

Main elements of a society:

• A minimum of 7 members
• A proper name
• Memorandum of Association & Rules and Regulations/ By-laws in the specified manner
• Initial members/ subscribers to be member of a Governing Body
• Resolution passed for the registration of Society
• Minutes of aforesaid meeting
• Address proof of location of Society
• Identity and Address proof of all members.

Section 8 Company (same as section 25 Company under Indian Companies act 1956): 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 an d no dividend is paid to its members.

The Indian Companies Act 2013 that came into force on April 1, 2014 and the old Section 25 has now become Section 8 with further additions. According to Section 8: “The Central Government may issue a License to:
A Limited or Private Limited Company having as its objects:

• The promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object and
• Intends to apply its profits, if any, or other income in promoting its objects and
• Intends to prohibit the payment of any dividend to its members.

Thus, a not-for-profit company may be registered with the Registrar of Companies. It cannot issue dividend to its shareholders. The Board of Director is the key decision making body in the Company. A minimum of 2 Directors and/or Shareholder are required to form the company.

MOA and AOA forms the legal document of a Section 25 Company. However, It needs to be registered with the Central Government through the Registrar of Companies after taking due approvals. The process is similar to that of formation of a Private Limited or Public Limited Co. The Motive Not for Profit is the differentiating factor. However it is a tedious task to form a company and requires much stricter statuary and Income Tax filling every year. The help of a Chartered Accountant may be required for registering the Company.

Main elements of a section 8 company

• A minimum of two trustees (members)
• MOA (in Form INC 13) and AOA of the company
• Declaration in Form INC.14 by an Advocate, CA, CWA or CS in practice that MOA and AOA have been drafted as per provisions of Sec.8 and rules made there under.
• Estimate of future income for next three years along with description of sources of income and objects of the expenditure.
• Declaration by each of the persons in Form INC.15

Taxation and FCRA registration for a NGO

Many NGOs feel that they are immune to all form of taxation, as they exist as a not for profit entity, this however is only a myth. The following section talks about important sections that offer tax exemptions to a NGO and also tax deductions to donors.

Section 11 and 12 of the Income- Tax Act 1961: These are the most important sections of Income tax for Religious and Charitable trusts. The taxation of trusts formed with the objective of providing relief to the underprivileged, work for environment, general public benefit, religious purpose, etc fall under this section. The section defines what part of Income of such trust is taxable and what is exempt. The Income can be derived from capital gain from the assets of the Trust, its activities, or from donations.

Section 12AA of the new Income Tax act defines how a trust can register under these sections. An application is to be made using form 10A along with relevant documents to the Income Tax Commissioner. This is one time registration and to avail Tax exemption, NGO needs to register under section 12 A.

Section 80 G: Donations made to a NGO registered under section 80 G are permissible for 50% deduction from the taxable income of the donation made for such a person or an organization making the donation.

e.g. If a Person makes a donation of Rs. 100 to an organization with 80 G registration then the person can avail Rs. 50 as deduction from his/her taxable income (not to be confused with Income Tax).

80 G is a onetime registration and can be done using form 10 G. The application is made to the Income Tax commissioner who has jurisdiction over such an organization.

The following are the document lists required for registration under 12A and 80G;

1. Dully filled in Form – 10A for registration u/s 12A registration and 10G for 80G registration.
2. Registration Certificate and MOA /Trust Deed (two copies – self attested by NGO head)
3. NOC from Landlord (from registered office)
4. A Copy of PAN card of your NGO
5. Photocopy of Electricity Bill / House tax Receipt /Water Bill
6. Evidence of welfare activities carried out & Progress Report since inception or last 3 years
7. Books of Accounts, Balance Sheet & ITR (if any), since inception or last 3years
8. List of major donors along with their address and PAN
9. List of governing body or board of trustees members with their contact details
10. Original RC and MOA /Trust Deed for verification
11. Any other document or affidavit / undertaking, if extra information is by the Income Tax department

Section 35 AC: To encourage businesses and corporate houses to donate for specific approved social welfare projects, a tax incentive has been produced under 35AC of the Income Tax Act. This section offers full deduction of the entire amount paid by business for financing particular schemes or projects. There is no limitation for the donor to donate under section 35 AC.

The application for getting 35 AC can be made to the Secretary, National Committee for Promotion of Social & Economic Welfare, Dept. of Revenue, Govt. of India, North Block, New Delhi – 110001.

Some of the projects for which the 35 AC is applicable are:

• Construction and maintenance of drinking water projects in rural areas and urban slums
• Construction of dwelling units for economically weaker sections
• Construction of schools for children belonging to weaker sections
• Relief and rehabilitation of handicapped children
• Establishment and running hospitals in rural areas exclusively for women and children.

Documents for registration under section 35AC

The application is to be made in 2 Sets, written either in Hindi or English containing the following documents:

1. Complete contact details
2. Audit Reports for the latest year and two preceding years.
3. Registration certificate
4. Copy of trust deed, rules & regulation, memorandum of association etc.
5. Contact details of current board members along with details of people holding important positions who left the organization during 3 years.
6. Copy of 80 G certificate
7. Activity report of last three years.
8. Additional information regarding the project/scheme to be submitted.
   • Title of project or scheme;
   • Date of commencement;
   • Duration and the likely date of completion;
   • Estimated cost of the project ;
   • Category or class of persons who are likely to be benefited from the project or scheme;
   • Affirmation that no benefit from the project or scheme other than remuneration or honorarium, will accrue to persons managing the affairs of the NGO ;
9. Such other particulars as the applicant may place before the National Committee.

FCRA Registration: The Foreign Contribution Regulation Act is the most important registration for a NGO that wish to receive contribution from foreign donors. Without FCRA registration an NGO cannot seek foreign donation in India. The Act is meant to regulate all donation foreign in nature received in India as donation for religious, charitable, social or environmental cause, whether such donation are received from Foreign Individual, Company, Society, Government or organization.

The approval for the registration is given by Ministry of Home Affairs, Government of India. The registration is preferable provided to organizations registered under either of the Societies Registration Act 1860, Indian Trust Act 1882, Charitable and Religious Trust Act 1920 or as a Section 25 Company. It is provided as Prior Permission under section 6(1A) (or one time incident specific permission) or Permanent Permission under section 6(1)(a), (permanent registration). The registration process takes anywhere from 4 months to 1 year or more and is provided only after thorough documentation and investigation by the MHA. Yearly compliance needs to be followed by the NGO once registered under FCRA. An organization can only open only one FCRA account in any Scheduled Commercial Bank of India. The Bank is ordered by MHA post approval for FCRA to monitor foreign donation transaction and report annually the receipts. FCRA account is to be maintained separately and not mixed with Local receipts. FC-3 form is used for application of FCRA. Any 3 year old NGO can apply for FCRA.

The documents required are;

1. Audited Balance Sheet, Profit& Loss Account or Income& Expenditure Account for the last 3 years.
2. Certified copy of formation documents like trust deed, rules & regulation, memorandum of association etc. and registration certificate, if any.
3. Details of activities of the organization during the last three years.
4. Registration details under section 11 and 12 and 80 G.
5. Commitment letter from foreign donor specifying the amount of foreign contribution