Understanding the Concept of Corpus Fund

– Treatment Under Income Tax & FCRA

Introduction

Corpus funds are a cornerstone of financial sustainability for NGOs, representing donations designated for long-term preservation to ensure organizational stability. Their treatment under the Income Tax Act, 1961, and the Foreign Contribution (Regulation) Act, 2010, is critical for compliance, tax benefits, and effective financial management. This section provides a comprehensive analysis of the definition, legal treatment, management practices, and challenges associated with corpus funds, equipping NGOs with the knowledge to leverage these resources responsibly.

Definition of Corpus Fund

A corpus fund is a reserve of donations specifically directed by donors to remain intact as capital, with only the income generated (e.g., interest, dividends) used for charitable purposes. Unlike general donations, corpus funds are not expended directly but serve as a financial backbone for long-term sustainability, funding recurring programs or capital projects.

Example: “Care India Trust,” an NGO focused on healthcare, receives a 50 lakh donation from a corporate donor with explicit instructions to maintain it as a corpus fund. The trust invests the amount in fixed deposits, using the annual interest of 3.5 lakhs to fund medical camps.

Treatment Under Income Tax Act

The Income Tax Act, 1961, provides specific provisions for the tax treatment of corpus funds:

• Section 11(1)(d): Corpus donations are exempt from tax as they are not considered income in the year of receipt, provided they are specifically directed by the donor to form part of the corpus. This exemption applies to trusts registered under Section 12A or 12AB.
• Conditions for Exemption:

• The donor’s intent to create a corpus must be documented in writing, such as through a donation agreement or letter.
• The principal amount must be preserved and not used for revenue expenditure.
• The income generated must be applied to charitable purposes, as per Section 2(15).

• Investment Requirements: Corpus funds must be invested in approved securities under Section 11(5), such as government bonds, fixed deposits with scheduled banks, or other instruments specified by the CBDT. Investments in speculative securities like shares or mutual funds are prohibited.
• Tax Implications of Misuse: If corpus funds are used for non-charitable purposes or withdrawn, they may be treated as taxable income, attracting penalties under Section 271.
• Case Law: In Sukhdeo Charity Estate vs. CIT (2014, ITAT), the Income Tax Appellate Tribunal (ITAT) held that corpus funds invested in fixed deposits remained exempt under Section 11(1)(d) even if temporarily misused, provided the donor’s instructions were clear and documented. This ruling emphasizes the importance of donor intent and proper accounting.

Example: “Care India Trust” receives a 20 lakh corpus donation, documented in a donor letter, and invests it in a government bond yielding 7.

Treatment Under FCRA

The FCRA, 2010, governs foreign contributions received by NGOs, including those designated as corpus funds:

• Section 19: Requires foreign contributions, including corpus donations, to be maintained in a designated FCRA account with the State Bank of India (SBI), New Delhi Main Branch, or its authorized branches, as per the FCRA Amendment, 2020.
• Utilization Rules: Corpus funds must be used only for purposes specified by the donor, with the principal preserved and income applied to approved activities under Section 8 of FCRA.
• Investment Restrictions: Funds cannot be invested in speculative instruments, such as shares or equity mutual funds, but can be held in fixed deposits or government securities approved by the SBI FCRA branch.
• Reporting Requirements: Corpus funds must be reported in Form FC-4 annually, detailing the principal, investments made, and utilization of income. Non-compliance can lead to suspension of FCRA registration.

Example: “Care India Trust” receives a 10 lakh foreign corpus donation from a US-based foundation, deposits it in an SBI FCRA account, and invests it in a fixed deposit. It reports the 70,000 annual interest usage for medical equipment in Form FC-4 for FY 2024-25, ensuring compliance.

Management Practices for Corpus Funds

To ensure compliance and transparency, NGOs must adopt robust management practices:

• Separate Accounts: Maintain corpus funds in separate bank accounts or ledgers to distinguish them from general funds, facilitating accurate accounting and audits.
• Documentation: Record donor instructions clearly in writing, such as through donation agreements or letters, and preserve them for FCRA or tax assessments.
• Investment Oversight: Establish a finance committee to monitor investments, ensuring compliance with Section 11(5) and FCRA guidelines.
• Regular Audits: Conduct annual audits by a chartered accountant to verify preservation of the corpus fund and proper utilization of its income.

• Transparency: Disclose corpus fund details in annual reports and financial statements, enhancing donor trust.

Pros and Cons

Pros:

• Provides long-term financial stability, ensuring sustained funding for programs.
• Tax exemptions under Section 11(1)(d) reduce financial liability.
• Enhances donor confidence by demonstrating commitment to sustainability.
• Supports large-scale or capital projects, such as building schools or hospitals.

Cons:

• Strict compliance requirements, including donor documentation and investment restrictions, add complexity
• Limited immediate access to funds, as the principal cannot be used for operations.
• FCRA reporting and banking requirements increase administrative costs.
• Risk of penalties for non-compliance or misuse, requiring robust governance.

Reforms and Solutions

• Simplified FCRA Guidelines: Streamline reporting for foreign corpus funds, allowing digital submissions to reduce administrative burden.
• Flexible Investment Options: Expand permissible investments under Section 11(5) to include low-risk mutual funds, improving returns while maintaining safety.
• Subsidized Audit Support: Provide government or CSR-funded audit services for small NGOs managing corpus funds.
• Education and Training: Conduct workshops to train NGOs on corpus fund compliance and management best practices.

Recent Updates (2025)

As of June 8, 2025, the Finance Act, 2021, introduced provisions to prevent misuse of corpus funds, requiring clear documentation of donor intent and stricter verification during tax assessments. The FCRA Amendment, 2020, continues to require foreign corpus funds to be held in SBI accounts, with increased scrutiny in MHA audits. No specific amendments to corpus fund rules have been announced in 2025, but the CBDT’s focus on digital transparency underscores the need for accurate reporting.

Table 3: Corpus Fund Treatment: Income Tax vs. FCRA

Conclusion

Corpus funds are essential for NGOs’ long-term sustainability, offering tax exemptions and a stable financial base. However, their management requires careful compliance with Income Tax and FCRA regulations, including clear documentation, approved investments, and regular reporting. By adopting robust governance practices and advocating for simplified regulations, NGOs can maximize the benefits of this funding model while minimizing risks.