Who Are Related Persons of a Charitable Trust, NGO, Society or Section 8 Company?

Transactions between a registered non-profit organisation and its founders, trustees, managers, substantial contributors, specified relatives or connected concerns receive special scrutiny because charitable income and property must not be diverted for private benefit.

Interested or Specified Persons under the Income-tax Act, 1961

For years governed by the Income-tax Act, 1961, section 13 regulates situations in which the income or property of a charitable trust or institution is used or applied for the benefit of specified persons. Section 13(3) historically included the author or founder, substantial contributors, certain HUF members, trustees or managers, specified relatives and connected concerns.

Important Change in the Substantial Contributor Threshold

Older versions of section 13 treated a donor as a substantial contributor where aggregate contributions exceeded ₹50,000. The Finance Act, 2025 relaxed this rule.

Under the amended framework and the corresponding current definition in section 355(h)(ii) of the Income-tax Act, 2025, a person is included where the person's total contribution to the registered NPO:

• exceeds ₹1,00,000 during the relevant tax year; or
• exceeds ₹10,00,000 in aggregate up to the end of the relevant tax year.

Accordingly, the old statement that every donor crossing ₹50,000 is automatically an interested or related person is no longer correct for the current regime.

Who Is a "Related Person" under Section 355(h)?

For a registered non-profit organisation, section 355(h) identifies the following categories:

Who Is a Relative?

Section 355(i) defines "relative", in relation to an individual, broadly. It includes:

1. the spouse of the individual;
2. the individual's brother or sister;
3. the brother or sister of the individual's spouse;
4. any maternal or paternal lineal ascendant or descendant of the individual;
5. any maternal or paternal lineal ascendant or descendant of the spouse;
6. the spouse of a brother, sister, or specified lineal ascendant or descendant; and
7. lineal descendants of a brother or sister of either the individual or the individual's spouse.

The statutory definition should be checked where a particular family relationship is uncertain rather than relying on ordinary-language concepts of "close relative".

What Is "Substantial Interest" in a Concern?

Section 355(n) defines substantial interest for this NPO framework. In broad terms:

• Company: shares carrying at least 20% of voting power are beneficially owned by the person, alone or together with one or more other related persons, at any time during the tax year.
• Other concern: the person, alone or together with one or more other related persons, is entitled to at least 20% of the profits at any time during the tax year.

A registered NPO should therefore examine both direct interests and interests aggregated with other related persons where the statute requires aggregation.

When Is Income or Property Treated as Benefiting a Related Person?

Section 337 includes, as specified income, any portion of income applied directly or indirectly for the benefit of a related person. Rule 183 of the Income-tax Rules, 2026 provides the detailed framework for identifying such benefits.

Examples requiring particular scrutiny include:

• lending money without adequate security or adequate interest;
• allowing use of land, buildings or other property without adequate rent or compensation;
• paying salary, allowance or other remuneration exceeding what is reasonable for the services rendered;
• providing services or facilities free of cost or at a concessional rate;
• purchasing shares, securities or other property from a related person for more than adequate consideration;
• selling shares, securities or other property to a related person for less than adequate consideration;
• diverting income or property in favour of a related person; and
• investing funds in a concern in which a related person has substantial interest, subject to the statutory framework.

Is Every Payment to a Trustee or Related Person Prohibited?

No. The law does not mean that a trustee can never receive remuneration or reimbursement. A genuine payment can be permissible where it does not constitute an impermissible benefit and is commercially and legally supportable.

For example, a trustee may receive reasonable remuneration for genuine services, reimbursement of properly incurred expenses, or professional fees supported by evidence. The organisation should document the nature of the work, terms of engagement, approval, market rate, services actually performed, invoices, payment trail and applicable tax deductions.

Loans and Advances to Trustees or Related Persons

Loans and advances require particular caution because favourable financing terms can amount to private benefit. Before entering into such an arrangement, the organisation should examine whether the transaction is legally permissible, adequately secured, carries appropriate interest, is genuinely connected with permissible activities, has been properly authorised and is correctly disclosed in the accounts, return and audit report.

Property Transactions with Related Persons

Property transactions can create a benefit where the organisation pays more than adequate consideration or receives less than adequate consideration. Independent valuation, competing quotations and governing-body approval are therefore particularly important.

For example, if a trust purchases a property from its founder for ₹2 crore when reliable evidence places the fair value at ₹1.2 crore, the excess consideration can raise a related-person benefit issue. The reverse concern arises where charitable property is transferred to a related person for inadequate consideration.

Investments in Concerns Connected with Related Persons

Investment of charitable funds in a connected concern remains a sensitive area. The old section 13 framework contained a limited 5% rule in section 13(4), but that historical provision should not be treated as a general permission under the current 2025 Act.

For current tax years, the NPO must examine section 337, section 350, section 355, Rule 183 and the permitted investment framework under the Income-tax Act, 2025 and Income-tax Rules, 2026.

Income-tax Act, 1961 vs Income-tax Act, 2025

Maintain a Related Person Register

A registered NPO should maintain a current internal register covering, where applicable:

• author or founder;
• trustees and managers;
• relevant HUF relationships;
• persons crossing the contribution thresholds;
• relevant relatives under section 355(i);
• companies and other concerns in which relevant persons have substantial interest;
• date on which a person became or ceased to be a related person;
• contribution amounts and cumulative totals;
• transactions with each related person or connected concern;
• supporting valuations, approvals and conflict declarations.

Related-Party Transaction Checklist

• Identify whether the counterparty is a related person under section 355(h).
• Check the current-year and aggregate contribution thresholds.
• Identify any concern in which relevant related persons have substantial interest.
• Document why the transaction is necessary for the organisation.
• Check whether price, rent, salary, interest or other consideration is adequate and reasonable.
• Obtain an independent valuation or market comparison where appropriate.
• Record governing-body approval and conflict-of-interest declarations.
• Preserve agreements, invoices, service records and payment evidence.
• Deduct and deposit tax at source where required.
• Review whether the transaction must be disclosed in Form 112 or the income-tax return.
• Assess whether any amount becomes specified income under section 337.

Audit Reporting - Form 112

Under the Income-tax Act, 2025, Form 112 is the audit report prescribed for a registered non-profit organisation required to obtain an audit under section 348. It replaces the earlier Form 10B / Form 10BB structure for current tax years under the 2026 Rules.

The current Form 112 framework specifically seeks information concerning related-person transactions and specified income. This makes accurate identification and record-keeping of related persons especially important for the annual audit process.

Examples

Trustee employed by the organisation

A trustee works full-time for the charitable institution and is paid a salary supported by employment records and reliable market comparisons. The payment is not automatically prohibited merely because the recipient is a trustee; the amount and circumstances must satisfy the applicable related-person benefit rules.

Excessive remuneration

If a trustee receives ₹10 lakh for services for which comparable personnel would ordinarily receive about ₹3 lakh, the excessive element may be treated as a benefit requiring examination under section 337 and Rule 183.

Loan without adequate terms

If a trust gives ₹20 lakh to a trustee without adequate security or reasonable interest, the arrangement can amount to an impermissible benefit depending on the facts and statutory conditions.

Donation of ₹75,000

A donor who contributes ₹75,000 during the current tax year does not cross the current ₹1 lakh annual threshold merely by that contribution. The organisation must nevertheless check the donor's aggregate contributions up to the end of the tax year against the ₹10 lakh threshold.

Section 25 Company and Section 8 Company

Older material often refers to a "Section 25 company". Under the Companies Act, 2013, the corresponding legal form is generally a Section 8 company. For income-tax purposes, the decisive issue is whether the entity has valid registration under the applicable non-profit provisions.

The Income-tax Act, 2025 expressly accommodates Section 8 companies and companies incorporated under the former section 25 of the Companies Act, 1956 that are treated as registered under the Companies Act, 2013, subject to the applicable registration requirements.

Records That Should Be Preserved

Good documentation is essential where transactions involve related persons. The organisation should ordinarily retain:

• trustee or board resolutions;
• conflict-of-interest declarations;
• quotations and comparative market data;
• independent valuation reports;
• agreements and engagement letters;
• invoices and service records;
• bank statements and payment evidence;
• TDS and other tax-compliance records; and
• Form 112 and return disclosures.

Official Resources

The following government resources may be used to verify the operative law and current NPO audit requirements. They are reference links within the article and are not navigation-menu items.

Conclusion

The current law focuses on preventing charitable income or property from being diverted to private benefit. For tax years governed by the Income-tax Act, 2025, section 355(h) defines the relevant "related persons", section 355(i) defines relatives, section 355(n) defines substantial interest, and section 337 brings income applied for a related person's benefit into the specified-income framework.

Charitable trusts, societies, NGOs and Section 8 companies should therefore maintain an up-to-date related-person register, monitor contribution thresholds, identify connected concerns, document every material transaction and ensure appropriate disclosure in the accounts, income-tax return and Form 112.

Disclaimer: This article provides general information. The consequences of a related-person transaction depend on the tax year, registration status, facts, governing documents, valuation evidence and the exact provisions and Rules applicable to the organisation.