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Charity

Charity, in its most restricted and common sense denotes relief of the poor. It means giving voluntarily to those in need. It covers the giving of both money, and of the self through service to the needy. Charity is defined as - relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit. India has a long history of civil society. Voluntary organizations were active in cultural promotion, education, health, and natural disaster relief as early as the medieval era.

There is always a need to supplement the Governmental efforts in various areas of welfare measure. Such a need arises not only because of lack of resources at the command of the Government, but also because of wealth of local knowledge available with Non Governmental Organizations (NGOs), which can be fruitfully utilized for the benefit of the society. Thus, N.G.Os exist not only in developing countries, but also in developed countries. N.G.Os may exist as nonprofit companies, associations or trusts. In fact, structure or management is not the essence of the N.G.Os. It is the objectives, which distinguish an NGO from a business organization. Tax laws of almost all countries provide tax breaks to religious or charitable N.G.Os in the form of exempting their incomes from tax and by way of granting tax incentives to the donors, who donate moneys to such exempted institutions. Such tax breaks and incentives are also embedded in various provisions of the Income tax Act, 1961 (the Act)

Laws Governing Charitable Organizations In India

Charities can be formed in multiple ways and may be subject to various acts of legislation. The legal framework governing the charitable institution will depend on the form of organization the charitable institution takes. There is no comprehensive central law for legal incorporation of nonprofit organizations that applies to trusts, registered societies and Charitable Companies alike.

Main laws governing the NGOs

  • Indian Trusts Act, 1882 (applicable primarily for private trusts)
  • Public Trusts Acts of various states in India.
  • The Societies Registration Act, 1860 or State Specific Societies Registration Acts
  • The Companies Act, 1956 ( as amended or replaced)
  • Income Tax Act, 1961
  • Foreign Contribution (Regulation) Act, 2010
  • Code of Civil Procedure, 1908
  • Charitable Endowments Act, 1890
  • Charitable and Religious Trusts Act, 1920
  • Indian Registration Act, 1908

Trusts

A Trust is defined in section 3 of the Indian Trusts 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.

The Trusts can most commonly be classified as under:

  • Public
  • Private

Public Trusts:A public trust is one that benefits the public at large or some considerable portion of it. Charitable trusts are considered to be public trusts. Though the Indian Trusts Act, 1882 mainly applies to private trusts, the Courts apply it’s general principles to public trusts as well.

Private Trusts:The purpose of the trust is to benefit an individual or a group of individuals or his or their descendants for any legal person and who is capable of holding property.

Privileges of Setting Up A Charitable Trust

  • Under section 11 of the Income-Tax Act, income received from property held by the trust is considered as exempt, if such income is applied or spent by the trust for charitable or religious purpose in India. Such application can be either for revenue or capital expenses. Exemption is also available if income is spent for charitable purpose outside India for promoting international welfare in which India is interested. To qualify for the exemption, the charitable trust has to apply at least 85% of the total income received from property, the balance can be accumulated to be utilized in future.
  • Charitable trusts can have perpetual existence, unlike private trusts. They do not have a particular tenure.

Registration of Charitable Trusts

No clear-cut statutes are available for the formation of a charitable trust. The only central law available is the Charitable and Religious Trusts Act, 1920. This legislation is very limited in its application. Registration of the trust deed may be made though it is optional. Without registration it would not be possible to get registration under the Income Tax Act and Foreign Contribution Regulation Act. Registration is to be made under the Indian Registration Act. For public charitable trusts in the State of Maharashtra and Gujarat, registration is to be made under Bombay Public Trust Act, 1950.

Registration Under Income-Tax Act

Charitable or religious trusts, societies and companies claiming exemption under sections 11 and 12 of the Income-tax Act are required to obtain registration under the Act. Private/family trusts are neither allowed such exemption nor required to seek registration under the Income-tax Act. The detailed procedure for Registration of Trust under Income-tax Act u/s. 12AA of I.T. Act. is as follows:

  • Application for registration in Form No.10A in duplicate.
  • List of Name and Address of the Trustees
  • Copy of Registration Certificate with Charity Commissioner or copy of application to him.
  • Certified True Copy of the Trust Deed.
  • PAN No. or Copy of application of the Trust.
  • PAN of the trustees.

Modes of Investments for Trusts

  • Investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government.
  • Deposit in any account with the Post Office Savings Bank.
  • Deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).
  • Investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963).
  • Investment in any security for money created and issued by the Central Government or a State Government.
  • Investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government.
  • Investment or deposit in any public sector company.
  • Deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and [which is eligible for deduction under clause (viii) of sub-section (1) of section 36].
  • Deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36.
  • Investment in immovable property.

Companies with Charitable objects, etc

Companies can be registered under Section 25 of the Companies Act,1956 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 (“Charitable Companies”). It can be formed for promotion of any useful object like sports, education, research activities etc. The term ‘No Profit’ does not mean that the Company cannot generate profit or income, but it essentially means that the Company can earn profits but the promoters cannot be benefited out of those profits. Due to better laws, such companies have the most reliable, strongest organizational structure.

Benefits of A Charitable Company

  • Freedom in choice of name

    Indian companies are required to  use the term ‘limited’ or ‘private limited’ as the case may be in their names as required by section 13. But Charitable Companies are allowed to dispense with the use of term ‘limited’ or ‘private limited’ from their names. This helps the company to enjoy limited liability without disclosing to the public the nature of liability of its members.

  • Publication of Name

    A Charitable Company has been exempted from the provisions of  section 147 and as such is not required to mention its name and address as required in case of all other companies.

  • Income Tax Benefits

    To get the benefits under the Income Tax Act, Charitable Company has to get itself registered under two different sections:

    • Section 12AA

      A Charitable Company can register itself u/s 12AA of the Income Tax Act and get the benefit of accumulation of its income to some extent for utilization in future years. The income of such company shall not be taxable if it is registered u/s 12AA.

    • Section 80G

      If a company u/s 25 is registered under the section 80G of the Income Tax Act, any donor donating the amount to such a company shall be entitled to a deduction to the extent of 50% of the sum donated, from its income.

  • Payment of Registration Fees

    The fees payable by a Charitable Company at the time of registration and further increase of its share capital has been kept very low in comparison to other companies and is at present fixed at mere Rs.50/- irrespective of the authorized amount of share capital.

  • Non Applicability of CARO

    Charitable Companies are exempted from applicability of Companies Auditor’s Report Order 2003(CARO). CARO has been made applicable to all companies from 1st January 2004. But CARO expressly exempts Charitable Companies from its applicability vide Clause 2(iii) of Para I of the Order.

  • Exercise of certain Powers

    Under section 292 there are certain specified powers which a Board of Directors of the concerned company can exercise only by passing of resolution at the meeting. The Board can exercise all other powers by passing of resolutions by circulation instead of taking them at meetings by following the procedure specified in section 289 of the Act. However Charitable Companies are allowed to decide following three matters by passing a resolution by circulation instead of at meetings:

    • the power to borrow moneys other than on debentures,
    • the power to invest funds of the company, and
    • the power to make loans.

Documents Required for Setting Up A Charitable Company

  • Draft of the Memorandum and Articles of Association. (In triplicate).
  • Details such as name, address, occupation of the promoters. (In triplicate).
  • List of companies, associations in which the promoters are directors or hold responsible position with the description of the position held.
  • List of the proposed members of the Board of Directors.
  • Declaration signed by an Advocate / Chartered Accountant / Company Secretary on non-judicial stamp paper of appropriate value.
  • The proposed sources of income and the expenditures thereof.
  • A note on the proposed activities and also the past activities, if any.
  • A statement of the grounds for making an application under section 25. In this statement a reference to the relevant clause in the Memorandum of Association regarding the Vision and Mission of the proposed company should be made.
  • Declaration signed by all the promoters on non-judicial Stamp Paper of appropriate value.
  • A certified copy of the notice to be published in newspapers

Within one week of making an application to the Regional Director a notice is required to be published in one English newspaper and one vernacular newspaper of the local area in which the Registered Office is situated.

Procedure for The Formation of Charitable Company

To register a Charitable Company, applicant is required to file Form 1A for name availability. Once the name is approved/made available, there is a further requirement of obtaining a license for a Charitable Company, for which Form 24 A is to be filed in order to obtain a license for such company. After obtaining license number, applicant can proceed further to incorporate a company by filing e-forms 1, 18 and 32.

Socities

Societies have been envisaged as welfare and charitable associations of people having a broad based membership. It can be established by seven or more individuals and registered under the Societies Registration Act, 1860. It provides for formation of a Society for any literary, scientific, or charitable purpose, or for any such purpose as is described in the Societies Registration Act, 1860 or in the State specific laws. Many States have created separate laws relating to Societies for registering and supervising such Societies.

Privileges of A Society

  • No obstruction for membership.

    Unless and otherwise specifically debarred, the membership of society is open to everybody. Nobody is obstructed to join because of religion, caste, creed, sex, color etc. A person can become a member of a society at any time he likes and can leave the society when he does not like to continue as member.

  • Democratic management.

    The elected members from and among themselves manage the society. Every member has equal rights through its single vote but can take active part in' the formulation of the policies of the society. Thus, all members are equally important for the society.

  • Stability and continuity.

    A society cannot be dissolved by the death insolvency, lunacy, and permanent incapability of the members. Therefore, it has stable life are continues to exist for a longer period. It has got separate legal existence. New members may join and old members may quit the society but society continues to function unless are otherwise all members unanimously decided to close the same.

  • Amend the memorandum.

    It provides greater flexibility as it is easier to amend the memorandum and bye laws of the society.

Registration of Society under Societies registration Act

The Societies must be registered under the Societies Registration Act of the respective States by following the procedure prescribed. The principal documents required for registration are as under:

  • Memorandum of Association along with a certified copy, signed by all the subscribers;
  • Bye-laws or the rules & regulations along with a certified copy of the same;
  • Affidavit on non-judicial stamp paper sworn by the President/Secretary. The affidavit should be attested by an Executive Magistrate or Notary Public;
  • Documentary evidence of the premises of the registered office;
  • A covering letter along with requisite fees, requesting the Registrar of Societies for registration.

Modes of Investment for A Society

There is no bar on transfer or use of funds, the only condition is that the funds should be used for charitable purpose.

Retirals

Provident Fund

Provident fund is a fund that provides benefits to the employees of a company (who are members of the fund), upon cessation of their employment. Both the employees and the employer are required to make contributions to the fund in accordance with the predetermined rates. To become eligible for membership of the fund, an employee must have completed one year's continuous service or have worked for 240 days during a period of 12 months. The employees have to contribute at a certain rate of the basic wage, dearness allowance and retaining allowances. The employers also contribute at the same rate.

Rates of Contribution

  • Employee Contribution

    Provident fund contribution is recovered @ 12% of wages from employees who earn up to a maximum wage of Rs. 6,500/- p.m. However, employees can contribute more than this statutory maximum, which will be considered as Voluntary Contribution.

    • Voluntary Contribution

      An employee can contribute voluntarily over and above the stipulated rate of PF contribution by opting for Voluntary PF scheme at any rate as he / she desires i.e. up to 100% of Wages.

  • Employer Contribution

    Employer is also required to contribute towards provident fund. The deduction is same as Employee contribution, i.e. 12%.

Of this 12%, 3.67% goes to Provident Fund and the balance of 8.33% goes to Pension Fund.

Procedure of Application

The registration of a Pension Fund by the Authority is a two stage process. At the first stage the Sponsor(s) makes an Application for In-Principle Clearance and upon the Sponsor(s) being found eligible, at the second stage the Pension Fund incorporated by such Sponsor(s) may apply for grant of a Certificate of Registration to act as a Pension Fund.

  • Application for In-Principle Clearance to set up a Pension Fund

    Application for In-Principle Clearance shall be made to the Authority in Form PFRDA/1 by the Sponsor(s) to undertake activities relating to Pension Fund Business.

  • Fee to accompany the Application for In-Principle Clearance

    Every application for In-Principle Clearance shall be accompanied by non-refundable application fee of Rs.10,00,000/- (Rupees Ten Lakh only), failing which such application will not be accepted.

The Sponsor(s) upon being issued the Letter of In-Principle Clearance to set up a Pension Fund by the Authority shall undertake the process of registration of Pension Fund. Application for Registration of Pension Fund shall be made to the Authority in Form PFRDA/2 by the Pension Fund within three (3) months from the date of issuance of the Letter of In-Principle Clearance to set up a Pension Fund to the Sponsor(s).

Documents Required for Application for In-Principle Clearance

The Application for In-Principle Clearance submitted by the Sponsor(s) shall comprise of the following documents:

  • Form - PFRDA/1, dully filled in along with all attachments/schedules duly completed and signed by the Sponsor(s).
  • Demand Draft for Rs.10,00,000.00 (Rupees Ten lakhs only) favoring the Pension Fund Regulatory and Development Authority payable at par at New Delhi as non-refundable Application Processing Fee.
  • Copy of the following documents:-
    • Certificate(s) issued by existing Financial Regulator in India
    • Certificate of Incorporation
    • Memorandum and Article of Association
    • Annual Reports for the last five years.
    • Certified copy of:
      • Corporate Governance Policy
      • Investment Policy
      • Investment Decision Making Process
      • Portfolio Guidelines
      • Sample Research Report
      • Risk Policy
      • Operations Manual
      • Audit Process and Report (internal/external)
      • MIS System, Reporting and Sample MIS Report
      • Compliance and Legal
      • Information Technology Platform
      • Data Management
      • Disaster Recovery Mechanism etc. with regards to Systems and Procedures implemented by the Company.
    • Detailed Business plan of Pension Fund for next five years which should inter alia include business and financial projections, economic viability, financial feasibility, IT & Infrastructure set-up, man-power planning, marketing/promotion and distribution plan etc.
    • Any other relevant document/information.

Application for Registration of Pension Fund

  • The sponsor(s) on being granted the in-principle clearance, within a period of ninety (90) days shall conform that the incorporated pension fund submits an application for registration to the authority, complete in all aspects in the specified format and order as per form–PFRDA/2, including a softcopy on compact disk or USB storage device.
  • The authority will not accept delivery of application by fax or e-mail. Application received in such manner shall be treated as defective, invalid and rejected.
  • All pages and paragraphs of the proposal should be numbered and all the papers should be properly bound together.
  • A proper index should be prepared giving the details of page numbers etc. in respect of the documents submitted in corroborations with the different sections of the application.

Documents Required for Application for Registration of Pension Fund

The application for registration submitted by the pension fund shall comprise of the following documents:-

  • Form - PFRDA/2, dully filled in along with all attachments/schedules duly completed and signed by the sponsor(s)
  • any other information that is to be submitted during the course of the proposal process.
  • copy of the following documents:-
    • Certificate of incorporation
    • Memorandum and article of association
    • Annual Reports (if any)
    • Certified copy of:
      • Corporate Governance Policy
      • Investment Policy
      • Investment Decision Making Process
      • Portfolio Guidelines
      • Risk Policy
      • Operations Manual
      • Audit Process and Report (internal/external)
      • MIS System and Reporting
      • Compliance and Legal
      • Information Technology Platform
      • Data Management
      • Disaster Recovery Mechanism etc. with regards to Systems and Procedures implemented by the Pension Fund Company.

Modes of Investment for Provident Fund

The PF manages separate schemes, each investing in a different asset class.

  • Asset class E (equity market instruments).

    The investment by an NPS participant in this asset class would be subject to a cap of 50%. This asset class will be invested in shares of the companies which are listed in Bombay Stock Exchange or National Stock Exchange and on which derivatives are available or are part of BSE Sensex or Nifty Fifty Index.

  • Asset class G (Government Securities).

    This asset class will be invested in central government bonds and state government bonds.

    Authorized Investments

    • Government of India Bonds
    • State Government Bonds restricted to 10% of the AUM of the Scheme and 5% to any individual state government
  • Asset class C (credit risk bearing fixed income instruments).

    This asset class contains bonds issued by any entity other than Central and State Government. This asset class will be invested in fixed deposits and credit rated debt securities. This includes rated bonds/securities of Public Financial Institutions and Public sector companies, rated municipal bodies/infrastructure bonds and bonds of all firms (including PSU/PSE).

    Authorized Investments

    • Fixed Deposits of not less than 365 days of scheduled commercial banks with following filters:
      • Net worth of at least Rs.500 crores and a track record of profitability in the last three years.
      • Capital adequacy ratio of not less than 9% in the last three years. Net NPA of under 5% as a percentage of net advances in the last year
      • List to be reviewed half-yearly
    • Debt securities:
      • Debt securities with maturity of not less than three years tenure issued by Bodies corporate including scheduled commercial banks and public financial Institutions [as defined in Section 4 (A) of the Companies Act]
      • Provided that at least 75% of the investment in this category is made in instruments having an investment grade rating from at least two credit rating agency. Apart from the ratings by agencies, PFM shall undertake their own due diligence for assessment of risks associated with the securities before investments
    • Credit Rated Public Financial Institutions/PSU Bonds
    • Credit Rated Municipal Bonds/Infrastructure Development Funds.

Superannuation Fund (SAF)

Superannuation Fund (SAF) is a retirement benefit provided by the employer. It is a contribution made by employer each year on your behalf towards the group superannuation policy held by the employer. This is an important part of creating wealth for your retirement. Interest on contributions is credited to the members account. Normally the rate of interest is equivalent to the PF interest rate. On attaining the retirement age, the member is eligible to take 25% of the balance available in his/her account as a tax free benefit. The balance 75% is put in an annuity fund, and the agency (LIC) will pay the member a monthly/quarterly/periodic annuity returns depending on the option exercised by the member. This payment received regularly is taxable.

Benefits of SAF

  • Retirement: One-third of the accumulations (contributions plus interest) can be taken as a tax-free lump sum payment and the remainder is used to buy annuities.
  • Resignation: The employee can get the equitable interest transferred to the superannuation plan of the new company if the rules of both the Schemes provide this facility or opt for a pension from the normal retirement date mentioned in the plan.

Contributions to SAF

The annual contribution by the employer to a SAF for any particular employee can be a maximum of twenty-seven percent of his salary for each year minus the employer's contribution, if any, to any provident fund (whether recognized or not) in respect of the same employee for that year.

Modes of Investment for SAF

All monies contributed to the fund can be invested in a Post Office Savings Bank Account in India or in a regular savings or current bank account with any scheduled bank or invested according to the investment pattern stipulated by the Act for pension funds and recognized provident funds. However, the returns generated by the above three options could be very different for the employees.

Gratuity

Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. It is a benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer (minimum 240 days a year).

Tax Treatment of Gratuity

The gratuity received by the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’. This tax treatment varies for different categories of individual assessee. For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories:

  • Government employees
  • Non-government employees covered under the Payment of Gratuity Act, 1972
  • Non-government employees not covered under the Payment of Gratuity Act, 1972