One RNPO, Collaborating with Another: Voluntary Donation or Service Fee?

A question that comes up more often than you'd expect: can a registered non-profit organisation (RNPO) pay money to another RNPO?

The short answer is yes. But before any money moves, there is one question that determines the entire compliance treatment of the transaction:

Is the payment made against services, or is it a voluntary contribution (sub-grant/ donation)?

Both look identical in the bank statement, but the law treats them very differently.

To keep this concrete, let’s carry one example through the whole article. XYZ Foundation (‘Payer’) wants to collaborate with ABC Foundation (‘Payee’). Let’s assume the transaction value is ₹2,00,000. Both are registered NPOs. Before XYZ collaborates with ABC, it has to be clear about what is the arrangement that both are entering into viz. services or voluntary contribution.

Services vs. voluntary contribution - the core distinction

A payment against services is a commercial transaction. One RNPO engages the other to do something specific - conduct a training, carry out a research study, run a baseline survey, provide programme implementation support - and pays for it. There is a quid pro quo: money in exchange for a defined service. In our example, XYZ Foundation engages ABC Foundation to run a baseline survey and pays ₹2,00,000 for it. XYZ Foundation is the service recipient (the payer); ABC Foundation is the service provider (the payee) - even though both are charitable entities.

A voluntary contribution, on the other hand, is a grant or donation given without consideration. The recipient RNPO applies the funds towards its own charitable objects, which are typically similar or aligned with the donor’s. There is no invoice, no deliverable owed back to the giver - at most, a donation letter, a receipt, and accountability through expense utilisation reporting. In the same example, XYZ Foundation simply gives ABC Foundation ₹2,00,000 to further ABC's charitable work, expecting nothing in return but the proper use of the money. XYZ Foundation is the donor; ABC Foundation is the donee.

The registered status of both entities does not change this distinction. It is the nature of the payment that decides the treatment, not the tax status of the parties - and the substance should be reflected in the documentation. A service agreement with a scope of work and invoices signals one thing; a grant letter or MOU with utilisation conditions signals another. Mixing the two, or papering a grant as a service contract (or vice versa), is where trouble begins.

If it is a payment for services

Once the transaction involves the rendering of services, ordinary commercial tax compliance applies. Registration as an RNPO under Section 332 of the Income Tax Act, 2025 (erstwhile Section 12A/12AB regime) does not create an exemption here.

TDS. XYZ Foundation, as the payer, must deduct tax at source on the ₹2,00,000 under Section 393 of the Income Tax Act, 2025 - the consolidated TDS provision that now covers what were earlier Sections 194J and 194C - depending on whether the engagement is professional/technical or contractual in nature. ABC Foundation's registration does not exempt it from TDS; ABC simply claims credit for the tax deducted when it files its return. So TDS here is a compliance mechanism, not a final cost. XYZ Foundation must also file its TDS returns and issue the certificate, like any other deductor.

GST. ABC Foundation, as the service provider, needs to examine whether the service is taxable. The GST exemption for "charitable activities" under Notification 12/2017-Central Tax (Rate) is deliberately narrow - it covers specified activities only, not everything a charity does - and most paid services such as training, research or implementation support fall outside it. If the service is taxable and ABC Foundation crosses the registration threshold, GST goes on the invoice - for most such services this is 18%, i.e., about ₹36,000 on the ₹2,00,000 fee. For XYZ Foundation that ₹36,000 is usually a final cost, because input tax credit is generally unavailable where there are no taxable outward supplies to set it against. Budget for it at the proposal stage, not after the invoice arrives.

If it is a grant or donation to another RNPO

Here, TDS and GST fall away - a donation without quid pro quo is not a payment for services. But a different set of implications takes over, and these are less intuitive.

The 85% rule. Under the Income Tax Act, 2025, donations made out of current year's income to another RNPO count as application of income only to the extent of 85% of the amount donated. The remaining 15% is simply lost as application. On XYZ Foundation's (the donor) ₹2,00,000 donation to ABC Foundation (the donee), that means only ₹1,70,000 (85%) can be claimed as application of income; the remaining ₹30,000 (15%) is simply lost as application. This changes the arithmetic of sub-granting structures, especially for intermediary NPOs that pass through most of what they receive.

However, not all funds held by an RNPO are treated the same way.

The treatment for donation made to another NPO out of accumulated income is different. This is money that the RNPO had set aside in earlier years with a commitment that it would use the money itself for its own charitable activities within the permitted time (allowed up to 5 years). If that money is instead donated to another RNPO, it no longer satisfies that condition. As a result, the donation is not treated as an application of income and may become taxable.

On the other hand, free reserves are funds that have already been subjected to tax (or are otherwise unrestricted). Since there are no conditions attached to these funds, the RNPO is free to donate them to another organisation without this issue.

So, whenever an RNPO makes a donation, it is important to identify which pool of money is being used:

• Current year's income - generally counts as application of income.

• Previously accumulated income - donating it to another RNPO does not count as application and may trigger tax.

• Free reserves - can generally be donated without these restrictions.

Presentation and disclosure. XYZ Foundation must report the ₹2,00,000 separately as a donation given to another RNPO in its Income Tax Return and Tax Audit Report.

FCRA - the hard stop. If the ₹2,00,000 being granted are foreign contributions, the position is quite clear. Sub-granting of FC funds is simply not permitted, however aligned the objects. XYZ Foundation cannot collaborate with ABC Foundation as a grantor. The only narrow route that survives is a genuine, arm's-length payment for services rendered in the ordinary course - properly invoiced and delivered, not a grant dressed up as one. Domestic, unrestricted funds carry no such bar and may still be donated under the income tax provisions above. This is precisely why the services-vs-contribution question must be answered honestly at the outset.

On the donee's side. ABC Foundation records the ₹2,00,000 as voluntary contribution income and applies it towards its own objects, with utilisation reporting as per the grant terms. 

The takeaway

It really comes down to two questions. Are we giving voluntarily, or are we paying for something delivered? And if the money in question is foreign contribution, are we even permitted to send it onward at all?

Both routes are legitimate, but they cannot be chosen casually or interchanged after the fact. Getting the classification right at the point of disbursement, rather than at the audit stage, keeps your books clean, your ITR accurate, and your FCRA compliance intact.

These practical distinctions are exactly the kind of challenges NGO finance professionals encounter in their day-to-day work. Through our NPO Accounting & Compliance Course, we focus on real-world accounting scenarios, tax provisions and compliance requirements that help participants move beyond theory and build confidence in handling complex transactions.

Proper classification of outgoing funds isn't just good bookkeeping. It's the foundation of accurate accounting, tax compliance and audit readiness. That's the discipline we bring to every NGO we work with at Aria CFO Services.

Disclaimer: This piece of information is meant to help you understand the implications of the different forms an inter-charity collaboration can take. It is not legal or tax advice, and it isn't meant to be used to structure your agreements. For that, please consult your lawyer, chartered accountant or other professional advisers on the facts of your specific case. And whatever the paperwork says, substance is of the essence: the treatment follows what is actually being done, not the label put on it.