Question

Choose the correct statement(s) regarding Non-Profit Organisations (NPOs).

1. NPOs are legally exempt from paying taxes and use excess funds for developmental activities rather than distributing them to shareholders.

2. All NPOs in India are referred to as Non-Governmental Organisations (NGOs) in international relations.

• A. 1 only
• B. 2 only
• C. Both 1 and 2
• D. Neither 1 nor 2

Answer 1

Answer:

A. 1 only

Understanding Non-Profit Organisations (NPOs)

• An Non-Profit Organisation (NPO), also known as a Not-for-Profit Organisation (NFP), is a legal entity established for a public purpose or to serve a specific mission, rather than for the financial gain of its members, directors, or shareholders.
• The primary objective of an NPO is to use any surplus revenue to further achieve its purpose or mission, which can be charitable, educational, religious, scientific, or public welfare-oriented.

Key Characteristics and Legal Framework in India:

• Tax Exemption: NPOs, if registered under specific sections of the Income Tax Act, 1961, are generally legally exempt from paying income tax on their surplus income, provided the income is applied towards their charitable or religious objectives.
  • Relevant Sections for Competitive Exams:
  • Section 12A/12AA: Grants registration to trusts/institutions making them eligible for tax exemption.
  • Section 80G: Allows donors to claim deductions for donations made to eligible NPOs.
• Utilisation of Funds: A fundamental principle is that excess funds (surplus) generated by NPOs must be reinvested into their charitable or developmental activities. These funds cannot be distributed as profits or dividends to any individuals, members, or shareholders.
• Legal Structures in India: NPOs in India are primarily registered under one of the following:
  • Trusts: Governed by the Indian Trusts Act, 1882 (private trusts) or various state-specific Public Trusts Acts.
  • Societies: Registered under the Societies Registration Act, 1860.
  • Section 8 Companies: Formed under Section 8 of the Companies Act, 2013 (formerly Section 25 of the Companies Act, 1956). These are companies formed for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment, etc., with the intention of applying its profits, if any, or other income in promoting its objects and prohibiting the payment of any dividend to its members.

Distinction between NPO and NGO:

• While the terms NPO and NGO (Non-Governmental Organisation) are often used interchangeably, especially in common parlance, there is a technical distinction, particularly in international relations and specific contexts.
• NPO is a broader term encompassing any organization that does not distribute its profits. This includes a wide range of entities such as educational institutions, hospitals, religious organizations, sports clubs, professional associations, and charitable trusts.
• NGO is a specific type of NPO that typically refers to organizations that are non-profit, voluntary citizens' groups organized at local, national, or international levels. They often focus on humanitarian, developmental, environmental, or advocacy work and frequently engage with governments and international bodies.
• Therefore, while many NGOs are NPOs, not all NPOs are NGOs. For instance, a local temple or a professional medical association would be an NPO, but might not be termed an NGO in the context of international relations unless they engage in cross-border advocacy or development work.
• Competitive Exam Fact: NGOs receiving foreign funding in India must comply with the regulations of the Foreign Contribution (Regulation) Act (FCRA), 2010.