Chapter X - Building Corpus, Endowment, Reserve

In India, the term corpus fund of an NPO/NGO means its capital fund as reflected in its balance sheet. In Western countries, instead of corpus, the term endowment is more commonly used. Laws regulating charitable institutions, including Income Tax Act, only refer to the term corpus. Colloquially, both terms are used interchangeably in India. However, technically a corpus donation is given as an unrestricted capital gift whereas an endowment donation comes with specified terms and conditions stipulated by the donor. Thus, income from the endowment fund can be used only for the purposes specified by the donor (e.g. annual scholarships to students only for studies in engineering) whereas income from the corpus funds could be used for any legitimate purpose (e.g. administrative overheads, general maintenance, etc.).

Being a capital receipt, corpus donation is not treated as income. In the NPO/NGO's audited statements of accounts, it is not reflected in the income and expenditure statement, instead it is booked as capital in the balance sheet. However, the interest/dividend generated from the corpus fund is computed as income of the NPO/NGO along with other sources of income.

Requirement for corpus donation

In India, under state laws (where applicable, e.g., Maharashtra Public Trusts Act 1950) and the Income tax Act 1961, donation or grant can be treated as a corpus donation if it is accompanied by a specific written direction of the donor stating that either the whole or part of the donation can be taken to the corpus. In the absence of any written direction of the donor, no contribution however large or small can be transferred to the corpus fund by the trustees. There is no upper or lower limit given under law for contributing towards corpus of an organisation and neither is there any ceiling laid down under law with regard to the ultimate size of the corpus fund that a trust or institution can build and maintain.

Creating other capital (reserve) funds

Apart from donations that come with the specific written direction of the donor to the corpus, the NPO/NGO can also endeavor in every financial year to budget it's income and expenditure in such a manner that every financial year, as allowed under the Income tax Act, it may apply or utilise a minimum eighty five per cent of its total income on the objects of the trust, including establishment/administrative expenses and set aside the balance fifteen per cent to add as unrestricted 'reserve fund'. Every financial year at least fifteen per cent of the NPO/NGO's income can be legally set aside and transferred to the balance sheet as capital fund. In other words, even the Income Tax Act indirectly encourages building of unrestricted reserve funds.

Can corpus be utilised?

Whether the corpus fund can be utilised or not, and when, and under what circumstances is subjective. The corpus fund must be, as far as possible, left untouched and only the interest/dividend earned should be utilised for either establishment/administrative expenses or programme related expenses, or as directed by the donor or for the purpose that the corpus fund may have been created (e.g. major repairs, new office etc.). Corpus fund received by an NPO/NGO may be 'restricted,' 'semi- restricted' or 'unrestricted. Unrestricted corpus fund may be utilised by an NPO/NGO under dire financial circumstances or for other capital expenditure.

Let us examine the different types of corpus or endowments

Using the corpus

The law does not specify under what circumstances the corpus can be used. However, usually charitable trusts and institutions dig into the corpus when there is a liquidity or cash crunch.

The corpus fund (unless earmarked by the donor/s in perpetuity or only for specific purpose) could be used to pay staff salaries (as we saw NGOs do during the pandemic when fund flow dipped) or to fund a new programme or project. In short, any bonafide purpose of the trust or institution.

Regulatory restrictions

Finance Act 2021 introduced Explanation 4(i) to section 11(1) of the Income Tax Act placing restrictions on application out of corpus donations. This Explanation specifies that corpus donation shall not be considered as application for charitable or religious purposes in the year of application or utilisation. However, such amount shall be allowed as application for charitable purpose in the year in which it is deposited back to the corpus to the extent of such deposit or investment. As per further amendment under Finance Act 2023, this must be done within a period of five years.

Let us assume that ABC Foundation has income of 100 during financial year 2024-25, but it spends 150 by using funds from its corpus fund. This would be treated as 150 spent. However, the organisation cannot claim the additional 50 utilised as application of income for charitable purpose during the financial year 2024-25. The application of income of this 50 can be claimed only in the year in which such amount used from corpus is put back into the corpus and reinvested in the modes specified under section 11(5) of the Act. This must be done within a period of five years. Hence, assuming ABC Foundation again has income of 100 during the subsequent financial year 2025-26, it utilises 35 and puts 50 back into the corpus (and invests the 50 in approved modes), it would mean it has met the requirement to apply at least 85% of its income during the financial year 2025-26 [i.e. 35 utilised plus 50 that is put back into corpus (which is now treated as application of income) and therefore 85% applied].

Is having a large corpus healthy?

Essentially, an endowment or corpus makes a charity much more sustainable and allows the trustees more flexibility on where to direct their efforts and resources. The interest of the endowment/corpus, if it is large enough, can fund the ongoing operating costs of the organisation. This also enables the organisation to take long-term planning decisions because they would be confident of recurring income, while giving their other donors greater reassurance that the organisation is in a strong and sustainable position. Having enough corpus ensures that a trust or institution can fully cover its programmatic obligations or liabilities. It is a sign financial strength and ensures sustainability even during years of financial or other crises. Corpus is essentially a 'rainy-day fund' and though not mandatory, is desirable to have. During the pandemic and the consequent lockdown, organisations with corpus were able to function seamlessly while many without corpus had to cut back on their programmes and activities, and payment of salaries to staff. An NPO/NGO having a healthy corpus is akin to a company having a healthy working capital.

Global comparison

The long-term, sustained impact produced by an endowment or corpus is highly attractive. Philanthropists across the world are increasingly understanding the power of endowments and the legacy they can create; this has largely been driven by higher education institutions that have led the way with endowed chairs, scholarships, and faculties. Universities across the world are also known for creating huge endowments. Oxford and Cambridge had endowments around the £5 billion mark in 2016, while other Russell Groupers followed closely behind: The University of Edinburgh had £300 million and King's College London, London School of Economics and the University of Glasgow skirted the £200 million mark.

According to U.S. News and World Report, the top five universities by endowment size at the end of the fiscal year 2018 were:

In the USA, Bill and Melinda Gates Foundation is one of the wealthiest private foundations with an endowment (corpus) of $75.2 billion USD as of 31st December, 2023.

Conclusion

Corpus is capital - a judiciously invested pool of money that provides a reliable source of income for the organisation to advance and sustain its charitable work. In our opinion, having a healthy corpus is indicative of planned long-term stability, fiscal responsibility, and financial viability. Having a healthy corpus means the trust or institution is looking at the long term and building the necessary assets for future sustainability. It indicates that the trustees are dedicated to the long-term support of the trust's mission. Corpus can provide annual support for the organisation's operating budget and ongoing activities, or offer options to meet new challenges by providing greater financial flexibility and self-sustaining income streams. Indeed, corpus can augment uncertain income sources, broaden the overall revenue mix, ensure long term sustainability, and even provide leverage for bank loans, should the need arise.