Introduction
Financial sustainability is vital for NGOs to ensure long-term impact and uninterrupted operations. By reducing dependence on external donors, NGOs can align closely with their mission, maintain independence, and respond flexibly to emerging needs.
Stable finances enable NGOs to cover operational costs, invest in capacity building, and enhance credibility, which attracts more donors and partnerships. With sustainable funding, NGOs can expand their reach, adapt to changes, and drive lasting impact without disruptions.
In essence, financial sustainability is the foundation for resilience, growth, and effectiveness, allowing NGOs to achieve their mission and serve their communities more effectively.
Key Strategies for Financial Sustainability
Beyond traditional fundraising through grants and donations, NGOs may achieve financial sustainability by adopting innovative approaches tailored to their mission and goals. Here are some key strategies for ensuring long-term financial security:
Raising Corpus Donations
A corpus fund created out of corpus donations received from donors, is a permanent financial reserve established by NGOs to generate a steady income stream, ensuring long-term sustainability. While the principal amount remains intact, the income earned through investments, such as interest income, supports the organization's programs and operations. These funds are typically built from donations explicitly designated for this purpose by donors, with clear instructions on their contribution towards the corpus.
Why Build a Corpus Fund?
Some of the key benefits of corpus are highlighted below:
Financial Stability and Long-Term Sustainability: A well-managed corpus generates a consistent income stream, providing the NGO with greater financial stability. This allows for long-term project planning and funding without the uncertainty of variable donations.
Credibility and Trust: A growing corpus fund enhances the NGO's credibility, making it more attractive to larger donors and investors. Financial responsibility and sustainability are highly valued by donors who seek to ensure that their contributions will have a lasting impact.
Risk Mitigation: Having a corpus helps NGOs navigate financial challenges by providing a cushion during lean periods. This reduces the reliance on unpredictable funding sources like donations and grants, ensuring continuity in operations.
It is pertinent to note that an NGO can treat such donation as “corpus” only when it receives such a discretion of the donor. It is suggested to receive a written consent of the donor, for an NGO to enjoy the tax exemption benefit of corpus donations under income tax law.
Where can such corpus donations be invested?
With recent amendments under the income tax law, corpus donations shall be tax exempt only if the amount is invested or deposited in the specified modes as per Section 11(5) of the Income Tax Act, 1961. It is pertinent to evaluate that such investments should also be permitted under the governing state charity law, like Maharashtra Public Trust Act, Foreign Contribution Regulation Act (FCRA), etc. as may be appliable to the NGO.
Some key investment options under section 11(5) read with Rule 17C, include-
Government Savings Certificates- Investment in savings certificates or any other securities or certificates issued by the Central Government.
Post Office Savings- Deposits in any account with a post office under a savings scheme.
Bank Deposits- Deposits in scheduled banks or co-operative banks.
Public Sector Bonds- Investment in any bonds issued by public sector companies or statutory corporations.
Investment in Units- Investment in units of the Unit Trust of India, mutual funds specified under Section 10(23D) of income tax act.
Debentures and Bonds- Investment in debentures or bonds of any company or corporation that are fully and unconditionally guaranteed by the central or state government.
Immovable Property- Investment in immovable property such as land and buildings, provided they are used for the charitable or religious purpose of the organization.
Generating General Purpose Reserves Through Bank Interest: Fixed Deposits and
Savings Account Deposits
Beyond the corpus, NGOs can create additional reserves by utilizing bank instruments such as Fixed Deposits (FDs) and Savings Account Deposits. Here's how each method contributes:
Fixed Deposits (FDs): NGOs can invest in FDs to earn steady interest income. These are low-risk investments, providing predictable returns that can be reinvested into NGO’s programs. FDs offer a reliable and safe income source, helping create a financial cushion for unforeseen expenses or lean periods.
Savings Accounts: While savings bank accounts typically offer lower interest rates compared to FDs, they provide liquidity and easy access to funds. NGOs can keep a portion of their operational reserves in savings accounts, allowing for immediate access when needed while still earning some interest.
It is observed that many NGO’s keep their funds into non-interest-bearing current accounts, which may dampen the earning potential of unutilised funds lying in the bank account. By strategically managing such financial tools, an NGO can generate consistent income and increase general purpose reserves through bank interest.
Income from charitable activities
Another key source for financial sustainability of NGOs is contracts to generate income from charitable activities. NGOs often enter into agreements with government bodies, businesses, or other NGOs to provide specific services such as research, training, consultancy, advisory, etc. which are in furtherance of or incidental to their main objects. Such agreements typically involve fees as a consideration for the services rendered.
It is pertinent to note that a contract to generate income from charitable activities for an NGO should align with and should be in furtherance or incidental to its main objectives, rather than towards business or profit-making activities, to avoid income tax implications. However, in order to avoid negative tax implications, it is suggested to incorporate only a nominal margin in the service fee (and not substantial markup), to generate surplus and build reserves, which can be vital for the NGO’s future sustainability and long-term operations. This approach helps maintain financial health without compromising the non-profit nature of the organization.
How do such Contracts contribute to Financial Sustainability
Recurring Nature: Such agreements, especially those tied to long-term or continuous projects, create a stable and recurring revenue stream. This consistent income reduces reliance on donations and grants, allowing the organization to plan and execute its activities with greater financial predictability.
Operational Flexibility: Income generated through such agreements can be allocated towards covering essential operational expenses or reinvested into core programs. This flexibility gives the NGO financial independence, enabling it to maintain its activities and respond to needs without waiting for external funding.
Enhanced Credibility and Partnerships: Entering into such agreements with reputable partners boosts the NGO’s credibility and fosters trust within the community and among stakeholders. This enhanced reputation can lead to new partnerships and additional funding opportunities, further strengthening the NGO’s financial position.
Diversification and Resilience: By incorporating income from such agreements into its funding strategy, an NGO diversifies its income sources. This reduces the financial risk associated with heavy reliance on one or two funding streams, making the organization more resilient and better equipped to handle financial uncertainties.
Capacity Building: Such income from charitable activities can be reinvested in building the NGO’s capacity. These investments strengthen the NGO's capability to fulfil its mission and improve long-term sustainability.
Through these benefits, such agreements contribute to a comprehensive strategy for achieving financial sustainability, enabling NGOs to continue their impactful work with stability and foresight. However, it is critical to evaluate the income tax implications while entering into such agreements with partners, to avoid any negative tax implications w.r.t. 12AB exemptions granted to NGOs. Some of the factors which determine the tax implications are passing of appropriate board resolutions, language adopted while drafting agreements, aligning the charitable activities with the objects as per Memorandum of Association (MoA), etc.
Online fundraising campaigns and crowdfunding platforms
Online fundraising campaigns and crowdfunding platforms have become vital tools for NGOs to collect donations. These platforms allow individuals and organizations to raise funds for specific causes by appealing to a broad audience through digital channels like social media, websites, and email campaigns.
What are the benefits of online campaigns and crowdfunding platforms for NGOs?
Wider Reach:
Crowdfunding platforms enable NGOs to reach a global audience, transcending geographical boundaries. This ensures greater visibility and the potential to attract donors worldwide. However, it is important for NGOs to adhere to the governing laws related to FCRA and other applicable laws.
Cost-Effective Fundraising:
Online campaigns typically require minimal overhead compared to traditional fundraising methods, such as events or direct mail campaigns.
Ease of Access for Donors:
The convenience of online payments encourages more people to contribute. Many platforms also provide options for recurring donations, ensuring a steady stream of income.
Transparency and Credibility:
Many crowdfunding platforms provide tools to track donation progress and share updates on the impact of contributions, building trust among donors.
Community Engagement:
Online campaigns enable NGOs to directly engage with supporters, fostering a sense of community. Interactive tools like live updates, videos, and comments allow NGOs to build long-term relationships with donors.
Social Media Amplification:
Campaigns shared on social media can go viral, exponentially increasing the reach and attracting new donors who resonate with the cause.
Flexibility and Speed:
Online platforms allow NGOs to launch campaigns quickly in response to emergencies or time-sensitive needs.
Option for anonymous donations on crowdfunding platforms Many online platforms allow donors to contribute anonymously, which appeals to individuals who prefer privacy in their charitable giving. This feature helps attract a wider range of donors who might otherwise refrain from public donations. Some donors may prefer to give anonymously to avoid publicity. However, it becomes critical to evaluate the income tax implications on anonymous donations received by an NGO. Below are some provisions of the income tax act applicable to anonymous donations, that an NGO should be aware of. What are Anonymous Donations? Anonymous donations are contributions where the identity of the donor (i.e. the name and address as per the income tax act) is not maintained, either at the discretion of the donor or where the records are not maintained by an NGO. Such donations also allow individuals to donate without seeking public recognition or acknowledgment. Taxability of Anonymous Donation u/s 115 BBC of the income tax act?
Anonymous donations up to 5% of the total donations received by an organization or ₹1,00,000, whichever is greater, are exempt from taxation. Funds raised through anonymous donations up to this limit can be collected without tax implications, while amounts exceeding this threshold will be subject to tax.
Any income received through anonymous donations beyond the exemption limit must be included in the total income of the NGO and taxed at a rate of 30%.
However, it is critical to evaluate the income tax and FCRA implications while devising fundraising plans through online campaigns and crowdfunding platforms to avoid any negative implications to NGOs w.r.t. governing laws. Financial Sustainability: A Cornerstone for NGOs In the pursuit of lasting impact and operational resilience, financial sustainability is a critical priority for NGOs. By adopting strategies such as building corpus reserves, leveraging bank interest, generating income from charitable activities, and utilizing online fundraising campaigns and crowdfunding platforms, NGOs can diversify their funding sources and establish stable, long-term financial health. These measures not only reduce reliance on traditional donations but also enhance credibility, operational flexibility, and the ability to navigate unforeseen challenges. With a robust financial foundation, NGOs can better fulfil their mission, expand their reach, and drive transformative change in the communities they serve.
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