Thinking of making a charitable donation to a nonprofit in India? While the country is home to the most nonprofits in the world, giving to India can be complicated even for experienced grantmakers.
Projected to become the world’s most populous country around 2027, according to the United Nations, India is home to almost 1.4 billion people and while the country has made great progress in the past decade, it is estimated that approximately 53.5 million Indians continue to live in poverty. A great majority of the estimated 3 million nonprofits operating in the country are working to reduce extreme poverty and address its impact on health and well being, access to education, social discrimination and exclusion, and more. India’s robust nonprofit sector, combined with the presence of a thriving Indian diaspora community in the US are a driving force behind cross-border giving to India. However, the best avenues to do so are not always clear.
US donors may not give directly to nonprofits located in India and receive a tax deduction in the United States. To qualify for a tax deduction, US donors who want to support charitable initiatives in India have a few options to consider: (1) they may donate to a US-based nonprofit which has programs in India, (2) a “friends of” organization which supports an Indian nonprofit, or (3) use an intermediary grantmaker (such as CAF America) to tax-effectively direct charitable funding to the organizations and causes they value. To learn more about mechanisms for international grantmaking, see Chapter Four of Cross-Border Giving: A Legal and Practical Guide (Charity Channel Press, 2018).
Within the context of cross-border giving, donors must be aware of both the US rules and regulations as well as the laws of the recipients’ country. Full regulatory compliance is needed to ensure that the outbound transfer of funds is possible and to enable the foreign nonprofit to access the funding in their country without inadvertently threatening the NGO’s legal standing.
Understanding the Local Context
The Foreign Contribution Regulation Act (FCRA) is India’s law regulating the flow of foreign funding into the country. Indian nonprofits must have a valid FCRA Registration or receive prior approval from the Ministry of Home Affairs to be able to legally receive charitable funds from donors outside of India.
FCRA was designed “[…] to regulate the acceptance and utilisation of foreign contribution or foreign hospitality … and to prohibit acceptance and utilisation of foreign contribution or foreign hospitality for any activities detrimental to the national interest…”
According to the Indian government foreign contributions “[…] include currency, securities, and articles. Funds collected by an Indian citizen in a foreign country on behalf of an NGO registered in India are considered foreign contributions. Moreover, funds received in India, in Indian currency, if from a foreign source, are considered foreign contributions.” Endowment support and the interest earned on such investments are also considered foreign contributions. Even direct donations—which do not allow for a tax-deduction in the US—to an Indian nonprofit made by an Indian citizen living in the US are considered foreign contributions if the individual has become a citizen of a foreign country.
With the re-granting prohibition now in effect, US donor organizations will no longer be able to rely on Indian nonprofit intermediaries validated via Equivalency Determination or Expenditure Responsibility to manage local due diligence and grantmaking. US donor organizations will have to rethink their model of grantmaking into India to work directly with the intended recipients on the ground and invest significant effort and resources to conduct the required due diligence on each grantee.
United States law requires that foreign charitable organizations, such as those operating in India, undergo extensive due diligence (either Expenditure Responsibility or Equivalency Determination) to establish whether donations to these organizations can be tax-deductible or to ensure that they are not taxable expenditures for 501(c)(3) grantors. As the leader in international grantmaking, CAF America keeps abreast of US and recipient country regulations governing cross-border giving.
B. Administrative expenses in any year are not to exceed 20% of the total foreign contribution funds received by a nonprofit in that year
The new Amendment introduces a considerable reduction of the annual cap on administrative expenses covered by foreign funds setting it at maximum 20% (lowered from the previous cap set at 50%). To fully gauge the significance of this restriction, additional guidance is needed to confirm what is to be considered an administrative expense. While some of the standards and definitions are unclear potentially leaving room for interpretation, according to rule 5 of the 2011 FCRA Rules the following expenses could qualify:
(ii) all expenses towards hiring of personnel for management of the activities of the person and salaries, wages or any kind of remuneration paid, including cost of travel, to such personnel
(iii) all expenses related to consumables like electricity and water charges, telephone charges, postal charges, repairs to premise(s) from where the organisation or Association is functioning, stationery and printing charges, transport and travel charges by the Members of the Executive Committee or Governing Council and expenditure on office equipment
(iv) cost of accounting for and administering funds
(v) cost of writing and filing reports
(vi) legal and professional charges
(vii) rent of premises, repairs to premises and expenses on other utilities
To ensure that their Indian grantees are in full compliance with the law, US donor organizations may need to revise their grant agreements in place to make sure the administrative expenses are set to comply with this enhanced limitation.
C. FCRA Accounts have to be opened at the State Bank of India, New Delhi Main Branch (NDMB). Starting on April 1, 2021, all foreign funding must be received in the designated FCRA Accounts at the State Bank of India, NDMB.
Prior to the changed requirements of India’s Foreign Contribution (Regulation) Amendment Act 2020, Indian nonprofits receiving foreign funding had to create a bank account at any government-approved bank. In line with the amended law, they are now required to open and solely use a new designated FCRA Account with the State Bank of India, New Delhi Main Branch.
In a public notice issued on October 13, 2020, the government allowed for a grace period for existing FCRA Account holders to open their new FCRA Account and confirmed that they are eligible to receive foreign funding in their current FCRA Accounts until March 31, 2021, or the date of opening their FCRA Account at the State Bank of India, NDMB whichever is earlier. All new applications for FCRA registration or prior permissions under FCRA, 2010 are required to open an FCRA Account at the State Bank of India, NDMB.
In preparation for the April 1st, 2021 deadline, US donor organizations will have to conduct outreach to their current Indian grantees and collect the information and proof of their designated FCRA Account at the State Bank of India, NDMB to be able to continue funding into the next year.
D. Organizations applying for FCRA registration or renewal are required to provide the Aadhaar number of all office-bearers, directors, or other key functionaries
While these provisions are principally impacting the Indian nonprofits and their leaders, US donor organizations should make sure that their grantees are able to comply with these requirements to make sure that their standing with FCRA is not jeopardized.
E. Non-compliance may result in the suspension of FCRA registration for an extended period and organizations that have their FCRA registrations canceled or forfeited, will have to surrender “the foreign contribution and assets created out of the foreign contribution” to a government-prescribed authority.
Previously the FCRA Registration of an organization that violates the provisions of FCRA could be suspended for “such period not exceeding one hundred and eighty days as may be specified.” However, the newly amended law empowers the Indian Ministry of Home Affairs to implement a suspension that can exceed six months.
On first impression this provision may seem to have more impact on Indian charities, however, it may play a significant role in shaping US donor organizations’ grantmaking strategies. While planning and defining strategy became ever more complex due to the uncertainty created by the amendment, many US donor organizations may find themselves in situations where a planned project becomes obsolete due to extended suspension periods. Moreover, they may have to deal with the very serious consequence of seeing any projects or assets of their grantees previously created with foreign funds, such as a hospital or school, become the property of a government-designated entity if the nonprofit loses or forfeits their FCRA Registration. US donor organizations may need to provide support to their Indian grantees to help them comply with the local laws and maintain their FCRA Registration, and they need to maintain open and close communication with grantee partners to ensure that they are in compliance prior to the transfer of funds.
Understanding the US Context
US donor organizations engaging in cross-border giving are required to conduct either (1) Equivalency Determination—ED (a substantial process to evaluate whether the foreign organization would qualify as an equivalent of a US 501(c)(3) organization) or (2) Expenditure Responsibility—ER (a process ensuring that the granted funds will be used for exclusively charitable purposes, in which case the review is focused on the charitable project and a “pre-grant inquiry” about the organization conducting the project).
Moreover, for cross-border grants to be legally compliant, tax-effective, safe, and in-line with best practices, the validation process on the recipient organization should extend to reviewing compliance with anti-money laundering and counter-terrorist financing regulations. Whether conducting ED or ER, validation requires an understanding of the legal and financial status, organizational structure, and governance of the recipient organization. As such, it is essential to be aware of the available legal structures for charitable entities under local laws.
To gain (and maintain) FCRA registration, Indian nonprofits must file a form FC-4 and a) register with the Central Government; b) agree to accept contributions through designated banks; and c) maintain separate books of accounts with regard to all receipts and disbursements of funds. Additionally, the nonprofit must renew their registration every five years and post quarterly reports regarding the receipt of foreign contributions on their own website or the Ministry of Home Affairs (MHA). Annual reports, form FC-4, must also be submitted to the Ministry.
FCRA-registered nonprofits must submit annual reports about foreign contributions received, including information about:
- the amount of foreign contribution and its source,
- the manner in which it was received,
- the purpose for which it was intended, and
- the manner in which it was used.
Nonprofits in India can be formed as one of the following three legal entities:
- Public Charitable Trusts can be established for purposes such as poverty relief, education, medical relief, or other public utility purposes. Public Charitable Trusts are regulated on state level, as federal law governs only private trusts (the Indian Trusts Act of 1882). The key difference between a private and public trust is whether the beneficiary population is a substantial segment of the population (i.e. serving the public).
- Societies are membership organizations that can be registered for charitable purposes and are regulated by the Societies Registration Act (1860).
- Section 8 Companies: These are limited or private limited companies governed under the federal Companies Act (2013), which are committed to promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object. Any profits or income of section 8 companies must be used exclusively to further these purposes, its members being precluded from receiving dividends.
Given this expansive and complex nonprofit landscape, as well as the need to navigate the rules and regulations of both donor and recipient jurisdictions, as a US donor and/or grantmaker, it’s vital to have a comprehensive understanding of the local context, as well as the requirements and conditions impacting cross-border giving to India. Ensuring that your gift is made in full compliance with all relevant laws, and also doing your due diligence on the nonprofit, will help provide peace of mind that your gift was made to the correct organization, that it was actually received by the organization, and that it will be used for its intended purposes.
In Summary
The legal environment for cross-border giving is constantly changing. Beyond keeping up to date with the latest regulations, it’s important to look at how these rules are translated into practice and to know how they are implemented and enforced. For donors, it’s often this type of insight that can be the most useful in practice.
How Can CAF America Help?
CAF America has made more than 2,500 grants totaling nearly $15 million dollars to FCRA-registered nonprofits in India within the past 5 years. The majority of our grantmaking into India has always gone to direct beneficiaries in the country, and not through an intermediary. As we are able to verify our grantees’ compliance with the amended FCRA rules, CAF America is committed and able to continue our grantmaking into India without any operational challenges.
We maintain full legal compliance with Indian laws and we keep abreast of the ever-changing regulatory environment impacting Indian nonprofits. We remain at our donors’ service to help bring their philanthropic vision to life.
