Legal Framework for Investment of NGO Funds

NGOs can invest surplus funds only in specified modes allowed under Indian law. Section 11(5) of the Income Tax Act outlines the permitted instruments.

• Permissible investments include savings accounts, fixed deposits, and government securities
  
• Equity, speculative instruments, or risky ventures are not allowed
  
• Surplus must remain within the charitable framework of the organization
  
• Non-compliant investments may lead to loss of tax exemptions
  
• Investment decisions must be approved by the board or finance committee

Section 11(5) Approved Investment Modes

To retain tax exemption, NGOs must invest only in government-approved instruments. These modes ensure safety and minimal risk to charitable assets.

• Deposits with scheduled banks and cooperative societies
  
• Units of mutual funds notified under Section 10(23D)
  
• Bonds and debentures guaranteed by the government
  
• Fixed deposits in public sector companies with strong credit ratings
  
• Investment in savings certificates and nationalized schemes

Board Approval and Policy Framework

Investments should be guided by a formal investment policy and board resolutions. This ensures that surplus is managed with diligence and accountability.

• Draft an investment policy outlining permissible instruments and risk profile
  
• Establish thresholds for investment amounts and diversification
  
• Require board approval for every investment decision
  
• Document minutes of investment-related resolutions
  
• Monitor maturity dates, renewals, and interest income tracking

Separation of Corpus and Operational Funds

Corpus funds and other restricted grants must be invested as per donor conditions. Separate accounting ensures compliance and clear reporting.

• Maintain a separate ledger for corpus investments and returns
  
• Do not use corpus returns for administrative costs without permission
  
• Reinvest corpus interest unless otherwise authorized
  
• Avoid mixing unrestricted surplus with restricted donor funds
  
• Provide clear disclosure of investment income in audit reports

Income Tax and Reporting Requirements

Investment income must be reported in returns and audit forms. If income is not applied within the permitted timeframe, tax may be levied.

• Report interest or dividend as income under Form 10B or ITR-7
  
• Ensure 85% of such income is applied within the financial year or accumulated lawfully
  
• File Form 9A or Form 10 for accumulation if application is deferred
  
• Track investment gains and losses to ensure they align with tax conditions
  
• Disclose investment details in annual reports and donor communications

Risk Management and Ethical Considerations

NGOs must prioritize safety, liquidity, and compliance when managing funds. Ethical management of investments protects the mission and donor trust.

• Avoid high-risk instruments that could endanger funds
  
• Do not engage in speculative trading or real estate flipping
  
• Select investments that align with organizational values
  
• Ensure transparent selection of banks, mutual funds, or instruments
  
• Regularly review investment performance and update the board accordingly