India – Receiving Charitable Donations? What You Should Think About.

Introduction
 

Charitable organisations, irrespective of the scale of their activities, seek and accept donations in various forms. Predictably, payment and receipt of donations, susceptible as they may be to misuse, are subject to regulation in India, and there are multiple legal complexities that need to be navigated through in connection with these.
 

In this article, we identify some questions that donee organisations must consider when accepting charitable donations in order to suitably address various legal issues and formalities applicable.
 

• Who is the donor?
   

Do we know the donor?
 

Often, charitable institutions accept anonymous donations (without maintaining a record of the names and addresses of the donors), when:
 

• The donors insist that their identities remain undisclosed; or
   

• Money is accepted either at a fundraising event, or through a bank account, or on a website, without recording the donor’s details.
   

However, accepting such anonymous donations could result in adverse tax consequences. In case the aggregate anonymous donations exceed Rs 1 lakh or 5% of the total donations received by the donee, whichever is higher, the amount of income tax payable under the Income-tax Act, 1961 (“IT Act”), is 30% of the excess.[1] No deduction/ exemption is available even if such donation is fully applied by the institution towards its charitable objects.
 

The exception is an anonymous donation accepted by a donee institution established (a) wholly for religious purposes, or (b) for religious and charitable purposes, unless the donation is made with a specific direction that it is for an educational institution/ university or hospital/ medical institution run by such institution.
 

Therefore, it is important for the donee organisation to have adequate information about the donor at the time of accepting the donation. If, however, the organisation has received anonymous donations, then it must ensure that it keeps a tab of the limits under the IT Act.
 

Is the donor foreign?
 

A charitable organisation must comply with the Foreign Contribution Regulation Act, 2010 (“FCRA”), in order to accept donations from a ‘foreign source’.
 

Under the FCRA, a foreign source includes the government of a foreign country, any international agency, any foreign company, a foreign trust or foundation, a foreign citizen, etc. A person who is an Indian citizen, whether or not residing in India, is not treated as a foreign source, but a foreign national (even of Indian origin) would be treated as a foreign source even if the donation is made from the NRO or NRE account.
 

Therefore, before accepting donations, the donee organisation must satisfy itself whether the donor is a foreign source or not. If the donor is a foreign source, then the donee must either (a) possess a certificate of registration to accept donations generally; or (b) have received prior permission to accept donations from that particular donor, under the FCRA.
 

Further, once such foreign contribution is received, intimation must be given to the Central Government of the amount received, its source and the manner in which the funds are being utilised, within nine months of the closure of the financial year, in Form FC-4.
 

• What is the nature of the donation?
   

A charitable organisation may receive two types of donations:
 

• Corpus donation, i.e. a voluntary contribution received with a specific written direction that it must form a part of the corpus of the charitable organisation;
   

• Non-corpus donation.
   

If the donee is registered as a tax exempt entity under the IT Act, then as per the IT Act, at least 85% of the non-corpus donations must be utilised by it for its activities in that financial year, subject to certain time-bound exemptions. Corpus donations, on the other hand, are not required to be mandatorily utilised and can therefore be retained and invested for as long as the charitable organisation deems appropriate.
 

Therefore, it is important for the charitable organisation to obtain written clarity from the donor on whether the donation is intended to be a corpus donation or not. Depending on the nature of the donation, it may be preferable for the donee to receive it as a corpus donation, so that it does not have to mandatorily spend it within a fixed period.
 

• What is the form of the donation?
   

Donations may be offered in various forms such as money, shares or property. Some considerations in this regard are:
 

• Money: Organisations should not accept cash donations in excess of Rs 2 lakh from one person in a day, or in respect of a single transaction, or in respect of transactions relating to one event or occasion from the same person.[2] Further, cash donations in excess of Rs 2,000 are not eligible for deduction under Section 80G of the IT Act.
   

• Shares: The organisation must ensure that the shares are disposed of within one year from the end of the financial year in which they are received. The organisation cannot continue to hold those shares beyond this period, as per the conditions attached to their income tax exempt status.
   

• Real estate: The donee must undertake thorough due diligence and ensure that the property is free from all claims, disputes, pending dues and charges.
   

• What terms are attached to the donation?
   

Terms of use
 

When making the donation, the donor may set out certain terms and conditions, such as:
 

• Manner of disbursement of donation
   

• Manner of utilisation of the donation
   

• Purpose for utilisation
   

• Acknowledgement of the donor in marketing and other material of the donee.
   

When accepting donations, organisations must ensure that such terms are reasonable and acceptable and are detailed in writing so that there is no scope for vagueness or ambiguity. Moreover, the stated purpose for the donation should not be in conflict with the objects clause in the constitutional documents of the donee.
 

If the donation is received by way of bequest under a Will, then the donee organisation must acquaint themselves with the terms of the bequest, and may renounce the donation if the terms are onerous.
 

Reporting
 

The donor may also seek periodic utilisation reports from the donee, so that the donor can exercise oversight. This is particularly so if the donor is contributing under its Corporate Social Responsibility (CSR) obligations under the Companies Act, 2013, because the donor will utilise the reports shared by the donee to prepare its own statutory CSR reports and publish them as part of the Board’s report.
 

When agreeing to share reports, donees must examine whether the frequency and scope of the reports sought by the donor are not excessive. If reporting compliance is likely to be onerous, it would be preferable to discuss the same with the donor at the outset to avoid future non-compliance.
 

• What other formalities must be complied with?
   

In order to enable a donor to claim deduction under Section 80G of the IT Act, the donee must furnish a statement of donations received to the income tax authority, and issue a certificate to the donor specifying the donation amount. Notably, the guidelines in this respect have not been prescribed yet.
 

Conclusion
 

The compliances and formalities identified above are only some of the key ones to be considered while accepting donations. There may also be other compliances applicable to the entity under the national or state laws by which it would be governed, including a number of ongoing compliances.
 

As there is only likely to be increased regulatory scrutiny going forward, charitable organisations are advised to give regulatory compliances as much importance as their day-to-day activities, to ensure that they do not land in the proverbial soup.

 

 

[1] Section 115BBC (1)(i) of the IT Act.

[2] Section 269ST of the IT Act.