Investment opportunities for charitable trusts & institutions

Charitable trusts and institutions are often in a dilemma where to invest charity funds and what is allowed and what is disallowed under law. Investment of funds is regulated by the state laws where applicable (e.g., Maharashtra Public Trusts Act 1950 under Section 35) and under central law (Income tax Act 1961 under Section 11(5).) Both laws prohibit investments in stocks and shares. However, Income tax Act allows investing in shares of public sector companies.

• Income tax allows investment in mutual funds however the trusts act allows investment only in select mutual funds approved by state government.
• Ministry of Home Affairs (under FCRA 2010) disallows the investment of foreign funds in any ‘speculative investment’ including a prohibition on investment in any Mutual Fund.

Thus, investment opportunities for NPOs are restricted.

Income tax Act

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 Govt. 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 Govt. 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:

• 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;
• any transfer of deposits to the Public Account of India;
• deposits made with an authority constituted in India for the purposes of housing accommodation, planning & development of cities, towns, and villages;
• 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:

• Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder;
• such other Mutual Funds set up by a public sector bank or a public financial institution or authorized 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 (i) authorizes 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, organizations 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.

(2) 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.

Approved Mutual Fund Schemes for Investments by a Charitable Institution (December 2024)

EQUITY SCHEMES

1. Aditya Birla Sun Life ELSS Tax Saver Fund
2. Aditya Birla Sun Life Equity Advantage Fund
3. Aditya Birla Sun Life Flexi Cap Fund
4. Canara Robeco Equity Tax Saver Fund
5. Franklin India NSE Nifty 50 Index Fund
6. ICICI Prudential ELSS Tax Saver Fund
7. ICICI Prudential Large & Mid Cap Fund
8. Nippon India Vision Fund
9. SBI Large & Midcap Fund
10. SBI Long Term Equity Fund
11. SBI ESG Exclusionary Strategy Fund
12. Sundaram Multi Cap Fund
13. Sundaram Equity Savings Fund
14. Tata Ethical Fund
15. Templeton India Value Fund
16. UTI Flexi Cap Fund
17. UTI Large & Mid Cap Fund
18. UTI Large Cap Fund
19. UTI Nifty 50 Index Fund

AGGRESSIVE HYBRID SCHEMES

1. Aditya Birla Sun Life Equity Hybrid 95 Fund
2. ICICI Prudential Equity & Debt Fund
3. SBI Equity Hybrid Fund
4. Sundaram Aggressive Hybrid Fund
5. UTI Aggressive Hybrid Fund

CONSERVATIVE HYBRID SCHEMES

1. Canara Robeco Conservative Hybrid Fund
2. UTI Conservative Hybrid Fund
3. Thematic Schemes
4. Aditya Birla Sun Life Digital India Fund
5. Aditya Birla Sun Life MNC Fund
6. ICICI Prudential FMCG Fund
7. ICICI Prudential Technology Fund
8. SBI Consumption Opportunities Fund
9. SBI Healthcare Opportunities Fund
10. SBI Technology Opportunities Fund
11. UTI MNC Fund

LIQUID SCHEMES

1. Aditya Birla Sun Life Liquid Fund
2. Canara Robeco Liquid Fund
3. ICICI Prudential Liquid Fund
4. Kotak Liquid Fund
5. Sundaram Liquid Fund

GILT/DEBT/BOND SCHEMES

1. Aditya Birla Sun Life Government Securities Fund
2. Canara Robeco Gilt Fund
3. Franklin India Government Securities Fund
4. ICICI Prudential Gilt Fund
5. Kotak Gilt Fund
6. UTI Gilt Fund
7. Aditya Birla Sun Life Income Fund
8. Aditya Birla Sun Life Low Duration Fund
9. Aditya Birla Sun Life Regular Savings Fund
10. HDFC Income Fund
11. Nippon India Income Fund
12. SBI Magnum Income Fund
13. SBI Magnum Ultra Short Duration Fund
14. Sundaram Short Duration Fund
15. UTI Low Duration Fund
16. UTI Money Market Fund
17. Bandhan Bond Fund – Income Plan
18. Bandhan Bond Fund -Medium Term Plan
19. Bandhan Bond Fund -Short Term Plan
20. DSP Bond Fund
21. ICICI Prudential Long Term Bond Fund
22. Kotak Bond Fund
23. UTI Corporate Bond Fund

Caution

1. Please make investment choices only after proper inquiry and studying offer documents;
2. Invest funds keeping short-term and long-term needs of your organization in mind;
3. Ensure that your choice of investment is not in violation of any regulatory law like the Trusts Act or Income tax or FCRA.