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Chapter IX - Investment of Funds

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Made publicly available in the spirit of open access by its author, Noshir Dadrawala (CEO, Centre for Advancement of Philanthropy), and collaborators CAP and Forbes Marshall.

The forms and modes of investment for a tax exempt NPO (including a public charitable trust, society, or Section 8 company) is governed by Section 11(5) of the Income tax Act 1961 which includes:

  1. Investment in Government Savings Certificates and any other securities or certificates issued by the Central Government under the Small Savings Scheme

  2. Deposit in any account with the Post Office Savings Bank Account

  3. Deposits in any account with any scheduled bank or a co-operative society engaged in carrying on the banking business (including a co-operative land mortgage bank or a co-operative land development bank)

  4. Investment in units of the Unit Trust of India

  5. Investment in any security for money created and issued by the Central Government or a State Government

  6. Investment in debentures of any company or corporation, the principal whereof and the interest whereon are guaranteed by the Central or State Government

  7. Investment or deposit in any public sector company

  8. Deposit with or investment in any bonds issued by a Central Government approved financial corporation engaged in providing long-term finance for industrial development in India

  9. Deposits with or investments in any bonds issued by any Central Government approved public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses

  10. Deposits in bonds issued by a public company engaged in long term finance for development of urban infrastructure

  11. Investment in immovable property

  12. Deposits with the Industrial Development Bank of India (IDBI)

  13. Any other form or mode of investment or deposit as may be prescribed

Rule 17C of the Income Tax Rules, 1962 has so far prescribed the following:

  1. Investment in the units issued under the Scheme of the Mutual Fund referred to in clause (23D) of Section 10 of the Income Tax Act, 1961

  2. Transfer of deposits to the Public Account of India

  3. Deposits made with an authority constituted in India for the purposes of housing accommodation, planning & development of cities, towns, and villages

  4. Investment by way of acquiring equity shares of a depository as defined in clause (e) of sub-section (1) of Section 2 of the Depositories Act, 1996

Hence, income tax permits investments in mutual fund schemes referred in Section 10, clause 23D of the Income Tax Act. Investments referred to in Section 10, clause 23D of the Income Tax Act includes:

  1. A Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder

  2. Such other Mutual Funds set up by a public sector bank or a public financial institution or authorised by the Reserve Bank of India and subject to such conditions as the Central Government may, by notification in the Official Gazette, specify in this behalf.

Accordingly, Part (1) authorises investment in ALL mutual funds registered under SEBI. Conclusion: Under Income Tax Act 1961, tax exempt NGOs/NPOS (whether registered as public charitable trust, society, or Section 8 company are permitted to invest in ALL mutual funds. Investment in land and building (immovable property) is also a permissible form of investment.

However, under FCRA 2010, foreign contributions received cannot be invested in any 'speculative investment' including any mutual fund. Also, organisations registered in states like Maharashtra and Gujarat are allowed to invest their funds only in certain mutual funds approved by the charity commissioner.

Mode of investment for trusts and societies in Maharashtra

Section 35 of the Maharashtra Public Trusts Act 1950 prescribes the modes of investment for public charitable trusts and societies registered with the office of the charity commissioner.

Section 35(1) Where the trust property consists of money and cannot be applied immediately or at any early date to the purposes of the public trust the trustee shall be bound [notwithstanding any direction contained in the instrument of the trust to deposit the money in any Scheduled Bank as defined in the Reserve Bank of India Act, 1934, in the Postal Savings Bank or in a Co-operative Bank approved by the State Government for the purpose or to invest it in public securities]: Provided that such money may be invested in the first mortgage of immovable property situate in [any part of India] if the property is not leasehold for a term of years and the value of the property exceeds by one-half the mortgage money: Provided further that the Charity Commissioner may, by general or special order, permit the trustee of any public trust or classes of such trusts to invest the money in any other manner: Provided also that, if any public trust has made the application to the Charity Commissioner for seeking the order granting the permission for investing the money in any other manner under the second proviso, the Charity Commissioner shall decide such application within three months from the date of receipt of such application, and where it is not practicable so to do, the Charity Commissioner shall record the reasons for the same.

Nothing in sub-section (2) shall affect any investment or deposit already made before the coming into force of the Bombay Public Trusts (Amendment) Act, 1954, in accordance with a direction contained in the instrument of the trust: Provided that any interest or dividend received or accruing from such investment or deposit on or after the coming into force of the said Act or any sum [so invested or deposited] on the maturity of the said investment or deposit shall be applied or invested in the manner prescribed in sub-section (1).

Note: Keep in mind State and Central Regulatory laws before making investment choices.

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