Jun 032021

Meaning of non-for-profit entities:

Not-for-Profit entities and small educational, medical institutions or hospitals, etc. existing solely for educational and/or philanthropic intentions enjoy tax exemption subject to meeting certain conditions These organizations are highly dependent on donations, as it is the primary source of funding for their activities

Meaning of corpus fund:

The corpus is never meant to be utilized and remains parked separately. Income accruing on such corpus funds is generally utilized towards the organization’s activities.

Taxation of corpus fund in light of FB 2021 amendment:

Existing tax treatment: Donations earmarked as Corpus are excluded from income for the year without any further compliance requirement and/or conditions. There are restrictions regarding the utilization of such funds. It does not matter whether corpus funds are used for activities or for making investments.

The issue in existing treatment: The above treatment leads to double deduction in the case of such organizations. For instance, an NGO received a corpus fund and construct a building out of that fund. Now, NGO for monies expended in the construction of the building would claim deduction two times, firstly at the time of construction of building and utilization of corpus fund for construction of building as monies expended in the construction of the building and secondly, as depreciation on the so constructed building. The Finance Bill, 2021 (the ‘FB’) has proposed significant changes in the provisions governing such institutions to eliminate the possibility of unintended double deduction / double-counting while calculating application or accumulation of funds

Thus, due to the proposed amendment, Corpus contributions received after 1 April 2021 are to be mandatorily invested in a specified manner by such qualifying organizations. This is a pre-requisite to avail tax exemption in respect of Corpus contributions.

Some of the key features of the proposed changes are:

Corpus funds should be earmarked and invested separately. It should not be mixed with other general/ non-corpus funds.
Investment condition applies only in respect of corpus contributions which are claimed as tax-exempt. Corpus created at the time of formation of the institution or out of basic accumulation, anonymous donations, etc. would remain outside the purview of this.
Corpus contribution could be freely utilized by organizations for their incidental business activities, operational expenses, etc. so far. However, going forward, they may have limited flexibility in using corpus donations.
Corpus donations utilized towards the objects can be considered as the tax-deductible applications only in the year of re-investment in the corpus.
Such funds will no longer be available as a part of free cash. Means such funds can not be held as cash in hand in the institutions.
Investment in immovable property out of such corpus contribution is one of the permissible modes of investment provided the asset is used only for the advancement of charitable or religious objectives of the institution.
Any shortfall in investments out of the current corpus donations would be fully taxable. The advantage of tax exemption on minimum utilization (as applicable to other voluntary contributions) is not available to such corpus contributions.

These changes will affect corpus donations received after 1 April 2021. Thus, Corpus donations received up to 31 March 2021 are not required to be statutorily invested and can be used in any manner whatsoever.