Many many many moons ago I got a low down on registering non-profits (NPO) in India (thanks Kallol :)) but I took a few months to blog about it so thanks for the strong poke :) 

NON-PROFIT ORGANISATIONS in India

There are 3 kinds of Non-Profit organizations that can be setup : a trust, a society or a section 25 company.


1. Trusts:

A trust can take donations and is meant for charitable purposes. Validity extends only in original state it was registered in. Example: If the NPO was registered in Karnataka state it is exempt from I-Tax only there and 80G is applicable.

TAX : Donations and any other form of income (membership, registration fees, sponsorships) in trusts are exempt from income taxes.

REG Cost (as of 2008) : Around INR.5000 to register and in Bangalore, the registrar of societies office is on Church street.



2. Society (or association)

Not very different from a Trust but a Society (or association as it is sometimes called) has a little more scope with a slightly open organisational structure. A society cannot have chapters (branches) outside Karnataka, although members could be from anywhere in India.

If it is registered in Karnataka state it is exempt from ITax there. It needs 7 members including 4 office bearers (chairman, vc, treasurer, secretary) and all of them must be from the state where the society is registered.  Annual meetings : treasurer prepares all the accounts year ending and get them signed by the secretary and the chairman and vice chairman and the secretary files them.

TAX : Service tax on sponsorships. Membership income is tax free (including service tax). 80G again requires the accountant. Donations and any other form of income (membership, registration fees, sponsorships) in trusts are exempt from income taxes.

REG Cost (as of 2008) : Takes 14 days to register and costs around INR5000 to register the same. In Bangalore the registrar of societies office is on Church Street.


3. A section 25 company :

Sec25 companies are different from a Trust and Society in every way. Some salient features ::

  • Sec25 can be registerd as a private or public limited company and the difference is in the number of minimum directors the company needs to have.
  • If the sec 25 company is private limited, then 2 directors are required, otherwise, 3 or 5 are required.
  • Directors can be from anywhere in india
  • Its different from normal companies, as in, that they can not distribute dividend to promoters/founders.
  • Exempt from ITax.
  • One time Pan-India registration.
  • The difference between a Society and Sec 25 is that the latter can enter into contract with any national or international institution. For example : a Sec25 NPO can sign a MoU with another organisation/firm/company
  • It need not be registered in every state and like a society its recognised all over the country, but for it to enter into a contract with another organisation that is outside the state it is registered, it need needs to be registered in that state as well.
  • It can have branches anywhere in India and have people working part / full time as regular employees.
  • Annual meetings : Regular AGM (annual general meeting) like all corporates do But the AGM requires quorum (members to be present or be represented by proxies) and annual returns and IT returns are filed by the accountants/company secretary. This depends on the MoA (memorandum of association) which will contain these details.
  • Donations and any other form of income (membership, registration fees, sponsorships) for sec 25 companies needs a separate application to the IT dept to get tax exemption. Sponsorship income attracts service tax everywhere. {HINT: Add service tax to sponsorship fee and invoice sponsors including taxes.}

REG Cost (as of 2008) : INR.15,000 + small expenses. Requires 2 months to register including a visit to the Regional Director's office in Chennai (if you are in South India).

GENERAL NOTES :

  • Although Trusts, Societies and Sec 25 companies are pan-India NP bodies, only a sec25 company can sign contracts with bodies outside the state. Societies and Trusts have limitations in this regard.
  • Members of a non-profit are not assessable or liable for taxes for income raising out of the organisation's activities. It applies to trusts, societies and sec 25 companies.
  • Even if the not-profit does not have any annual income, it WILL need to file a IT-return. The return will simply put income as 'zero'. For activities in the adhoc period of operation, one can lump it as 'pre-operative expenses' and include it in the books when the not-profit is formed.


Below is a comparison chart for the main differences between a trust, a society and a section 25 company


 

Public Trust

Society

Section 25 Company

Statute/ Legislation

Public Trust Act like Bombay Public Trusts Act of 1950

Societies Registration Act of 1860

Companies Act of 1956

Jurisdiction of the Act

Concerned State where registered

Concerned State where registered

Concerned State where registered

Authority

Charity Commissioner

Registrar of Societies

Registrar of Companies

Registration

As Trust

As society (and by default also as  Trust in Maharashtra & Gujarat)

As Section - 25 company  

Main Document

Trust deed

Memorandum of Associations and Rules & Regulations

Memorandum and Articles of Association

Stamp Duty

Trust deed to be executed on non-judicial stamp paper of prescribed value

No stamp paper required for Memorandum of Associations and Rules & Regulations

No stamp paper required for Memorandum and Articles of Association

Number of persons needed to register

Minimum two trustees; no upper limit

Minimum seven; no upper limit

Minimum seven; no upper limit

Board of Management

Trustees

Governing body or council/managing or executive committee

Board of Directors/Managing Committee

Mode of succession on board of management

Usually by appointment

Usually election by members of the general body

Usually election by members of the general body

Source:  Mathew Cherian, Director CAF India, New Delhi (Source : Internet)