Maintaining Books of Accounts for NGOs

Legal Framework

Maintaining accurate books of accounts is a fundamental requirement for NGOs to comply with both the Income Tax Act, 1961, and the FCRA, 2010. Under Rule 17AA of the Income Tax Rules, 1962, NGOsregistered under Section 12A(1)(b)(i) or Section 10(23C) must maintain detailed financial records. Similarly, Section 19 and Rule 11 of the FCRR, 2011, mandate separate books for foreign contributions, ensuring transparency and accountability

Income Tax Requirements

The Income Tax Act requires NGOs to maintain comprehensive financial records to substantiate their income, expenditure, and exemptions. The requirements include

• Books: General ledger, cash book, journal, bills, and receipts, capturing all financial transactions.
• Additional Documents: Records of projects, income sources, utilization of funds, and property holdings.
• Preservation Period: Books and documents must be preserved for 10 years from the end of the relevant assessment year.

Example: ”Child Welfare Trust” in Mumbai maintains a general ledger, cash book, and bills for its educational and healthcare programs. It uses accounting software to ensure accuracy and stores records in both physical and digital formats for 10 years, as required.

FCRA Requirements

Under the FCRA, NGOs must maintain separate books of accounts for foreign contributions to ensure compliance with Section 19. The requirements include:

• Books: Separate Receipts and Payments Account, Income and Expenditure Statement, and Balance Sheet for foreign contributions, maintained in the designated FCRA bank account
• Accounting Method: Accounts for Form FC-4 must be prepared on a cash basis, recording
  transactions as they occur.
• Preservation Period: Records must be preserved for 6 years from the end of the financial year.

Example: ”Child Welfare Trust” receives 20 lakhs in foreign contributions for a child nutrition program. It maintains a separate FCRA ledger in its SBI, New Delhi account, recording receipts and expenditures on a cash basis, and preserves these records for 6 years.

Comparison

Table 4: Income Tax vs. FCRA Bookkeeping

Pros and Cons

Pros:

• Ensures compliance with legal requirements, avoiding penalties.
• Facilitates smooth audits by providing clear financial records.
• Builds donor and stakeholder confidence through transparency.

Cons:

• Time-consuming, requiring dedicated resources for bookkeeping.
• Investment in accounting software or personnel increases costs.
• Maintaining separate FCRA accounts adds complexity.