A Non-Government Organization (NGO) is an organization which performs charitable work in society. It is run by volunteers without any interest in earning a profit. An NGO does not need to be registered, but can be registered if so desired by the main members. The 3 registration options are:
- Registration can be done as a Society with the Charity Commissioner of the state. Here, at least 7 members are required to form a society. A society needs to conduct Annual General Meetings and hold periodic elections.
- Registration can be done as a Charitable trust with the Charity Commissioner of the state. At least 3 trustees are required to form a trust. A trust does not have to conduct Annual General Meetings or hold periodic elections. All trustees are financially liable for the trust’s activities.
- Registration can be done as a Non-profit company under section 25 of the Indian Companies Act. A non-profit company needs to conduct Annual General Meetings and hold periodic elections. There is no need to interact with the Charity Commissioner, reducing bureaucratic interactions.
All 3 forms of registered NGOs have to file their Income Tax returns mentioning their PAN number. All regulations of the Income Tax Act apply equally to all 3 types of NGOs. Apart from donations, the registered NGO can make profits (or have excess income), but this has to be used for the trust’s non-profit activities only. If the combined annual donations and income are greater than Rs 200,000, then a Chartered Accountant has to audit the returns. Registered NGOs have to use 85% of their received donations and income for that financial year, in that financial year itself. If a surplus amount remains, a letter should be submitted to the Income Tax department stating that they will spend the money in the subsequent financial year [section 11(1) of the Income Tax Act]. Otherwise, the excess amount is taxed. However, if donations are being collected for a specific cause, then surplus can be accumulated for up to 5 years.
Generally, a society or a trust should not pay a salary to the trustees. A Board member of a non-profit company is allowed to take only a reasonable remuneration. However, expenses can be reimbursed by any registered NGO.
The registered NGO may apply with the Income Tax department for a 80G exemption certificate for their charitable activities. Their donors can claim 50% tax exemption for the said donation under this section 80G. However, the total exemptions cannot exceed up to 10% of donor’s total income. Since 2009, 80G exemption certificates do not need any renewals.
There is a special section 35AC, wherein 100% exemption is available to the donor. These are for special projects like providing drinking water, building schools, promoting sports etc. Research institutes can apply for a special exemption certificate under section 35(1) for up to 175% exemption for their donors. But, these donations and returns may be regularly scrutinized.
Donation to a corpus fund is a capital and hence cannot be used for general expenses. Any donation can be treated as a corpus donation, if the donor gives his consent in writing.
The content of this article is based on this website’s author’s personal experience of running a trust for almost 2 decades, and from a publication by Noshir H. Dadrawala of Centre for Advancement of Philanthropy.