Project Accounting for NGOs & CSR

NGOs registered under the Income Tax Act must follow the Guidance Note on Accounting by Not-for-Profit Organisations issued by the ICAI, which recommends fund-based accounting segregated by project. Additionally, entities receiving foreign contributions must maintain project-wise accounts as mandated under Rule 17 of the Foreign Contribution (Regulation) Rules 2011. Each restricted grant must be tracked separately so that unspent balances are correctly disclosed in the Statement of Income and Expenditure. Failure to maintain project-wise records is a common audit qualification and can trigger scrutiny under Section 12AB renewal proceedings.

Unutilised restricted grant funds must be carried forward as a liability (Grant Received in Advance) or as a separate fund balance, not recognised as income, in line with the ICAI Guidance Note on Accounting by Not-for-Profit Organisations. If the donor agreement specifies a refund clause for unspent funds, the amount is classified as a current liability under Schedule III of the Companies Act 2013 (for Section 8 companies) or under the applicable format for trusts and societies. For CSR grants specifically, Rule 4(6) of the Companies (Corporate Social Responsibility Policy) Rules 2014 requires unspent amounts under ongoing projects to be transferred to a designated bank account within 30 days of the financial year-end. Correct classification protects the NGO's tax-exempt status under Section 11 of the Income Tax Act 1961.

Mixing project funds in a single bank account is permissible but creates significant accounting and audit risk; best practice is to open separate bank accounts per major project or donor. For foreign contributions, Rule 9 of the Foreign Contribution (Regulation) Rules 2011 mandates that all FCRA receipts flow exclusively through the designated FCRA bank account at SBI Main Branch New Delhi or the permitted utilisation account, and mixing FCRA and domestic funds in one account is a criminal violation under Section 35 of the Foreign Contribution (Regulation) Act 2010. The statutory auditor will require a bank reconciliation per project to certify the utilisation certificate (UC) demanded by government donors under General Financial Rules 2017, Rule 230. Maintaining project sub-ledgers even within a single account is the minimum compliance requirement.

For central government grants, the auditor certifies a Statement of Expenditure (SoE) and a Utilisation Certificate in Form GFR 12-A prescribed under General Financial Rules 2017, Rule 230(7). For state government grants, the format varies by state, but the auditor's certificate must confirm that funds were spent for the sanctioned purpose and in accordance with the grant conditions. Where the project involves Ministry of External Affairs or bilateral aid, the auditor may also need to certify compliance with the Development Assistance reporting framework. Under the FCRA, the NGO must file Form FC-4 annually on the FCRA Online portal and the auditor's certificate is a mandatory enclosure per Rule 17(1) of the Foreign Contribution (Regulation) Rules 2011.

An NGO's 80G approval under Section 80G of the Income Tax Act 1961 (renewed under Section 80G(5)(vi) read with the provisional and final registration regime introduced by the Finance Act 2020) covers the organisation as a whole, not individual projects. However, during 12AB/80G renewal scrutiny, the Assessing Officer reviews project-wise expenditure to confirm that funds were applied for charitable purposes as defined under Section 2(15) of the Income Tax Act 1961. Donors claiming deduction under Section 80G must receive a certificate quoting the NGO's PAN, 80G registration number, and the applicable deduction limit (50% or 100% with/without qualifying limit). Poor project accounting that cannot substantiate charitable application of funds can lead to cancellation of 80G registration under Section 80G(5)(vii), cutting off donor incentives entirely.