What is a Charitable Trust?

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 identities:

(i) Society registered under Societies Registration Act, 1860.

(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 activities.


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 Property.

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 trust.

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 trusts.  

i Simple process of registration;

ii Simple record-keeping and even simpler regulations;

iii Low possibility of interference by the regulator; and

iv Exemption from tax due to charitable nature of operations;


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 NGOs;

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 this exemption.

For availing exemption under Section 11, the Society / Trust is required to fulfil the following conditions:

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 risk appetite.

Special Note on Section 2 (15) of the Income Tax Act:

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 utility

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 April, 1962.

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 education.

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 affected.

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 amendment.
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 manner.


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 documents

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 agencies.

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 FCRA.
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 years;
  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 Societies;
  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 non-profit company);
  9. FCRA does not allow mixing up of Indian funds and FCRA funds. This means both funds are to be maintained separately.


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