Payment to related person under Section 337

Non-profit organizations are not allowed to use their income or assets to benefit certain people closely connected to the organization, i.e. related persons. These include the founder, trustees, their relatives and others who may have a personal or financial interest in the organization. If any such person receives a direct or indirect benefit like free use of organization property, personal payments from organization’s income, or business favours, the exemption is lost. Further, such income applied for the benefit of a related person is categorised as specified income as per section 337 of the Act and shall be liable for tax at higher rate of 30% in the hands of the registered Non-profit organization.

Related Persons as per section 355(h) includes:

1. Author or founder of the registered non-profit organization
2. Where such author, founder or person is a Hindu undivided family, a member of the family
3. Trustees or Managers of the registered non-profit organization
4. Relative of those mentioned in above 3 points
5. Anyone who has substantial influence or contributes significantly (more than Rs.1,00,000 during the relevant tax year or Rs.10,00,000/- in aggregate up to the end of the relevant tax year)
6. Entities in which any of these persons mentioned in points.1, 2, 3 & 4, have a substantial interest.

Note: Penalty may be levied under section 445 of:

1. 1. 1. a sum equal to the aggregate amount of income applied for the benefit of any related person in case violation is noticed for first time in any tax year, and
      2. a sum equal to 200% of the aggregate amount of income applied for the benefit of any related person in case the violation persists in the subsequent tax years.