Accounts and audit for NGOs in India

An NGO in India must keep proper books of account, have them audited each year once its income crosses the threshold in the Income-tax Act, 2025, and file the audit report in Form 112 (formerly Forms 10B and 10BB) by 30 September after the tax year. A Section 8 company also needs a statutory audit under the Companies Act every year, and some states require trusts and societies to file audited accounts with their registrar or Charity Commissioner.

Good accounts do more than satisfy the law. They show donors and CSR teams where their money went, keep the NGO’s tax registration safe, and give the board the numbers it needs to make decisions. Most of the tax trouble NGOs get into, from losing an exemption to paying tax on money spent in cash, starts with weak books.

This guide covers which accounts and audits each law requires, the books to keep, cash versus accrual accounting, fund-based accounting for money given for a purpose, the cash rules, internal controls, what auditors check and how to choose one. It is for NGO staff, treasurers, board members and their accountants. Our guide to filing the tax return and audit report covers the filing process in detail.

What each law requires

Missing the income-tax books, audit or return has a heavy cost: under Section 353 of the 2025 Act, the NGO’s regular income for that year, less its allowable spending on its objects, becomes taxable at normal rates.

The books to keep

The Income-tax Rules, 2026 set out the books and documents a registered NGO must keep, in Rule 187, which replaced the old Rule 17AA. They include:

• a cash book, a ledger and a journal;
• the bills, receipts and vouchers behind every entry;
• records of donations, with each donor’s name, address and PAN where you have it;
• project records, showing income and spending for each activity;
• registers of fixed assets, investments and loans.

Books can be kept on paper or electronically. Keep them safely for many years: the old Rule 17AA required ten, and your CA can confirm the period under the new rule.

Alongside the books, keep the minutes of board meetings, the register of members (for a society or company), grant agreements and correspondence, payroll and tax-deduction records, and the declarations of interest of your board members.

Cash or accrual?

There are two ways to keep accounts:

• Cash basis: you record money when it comes in or goes out. The result is a receipts and payments account. It is simple, but it hides what you owe, what you are owed and grants you’ve received for work you haven’t done yet.
• Accrual basis: you record income when it is earned and expenses when they are incurred, whether or not cash has moved. The result is an income and expenditure account and a balance sheet.

A Section 8 company must use the accrual basis: Section 128 of the Companies Act treats books not kept that way as improper. For everyone else, the Institute of Chartered Accountants of India (ICAI) recommends it. Its Technical Guide on Accounting for Not-for-Profit Organisations (third edition, June 2023, issued by its Accounting Standards Board) applies to NGOs whatever their legal form, recommends that all NGOs keep accrual-basis books, and recommends that they follow ICAI’s accounting standards, except Section 8 companies, which follow the Companies Act.

Fund-based accounting

An NGO’s money comes with strings of different lengths. The ICAI’s guide recommends fund-based accounting, which keeps them apart:

• Restricted funds: money whose use the donor has restricted, such as a CSR grant for eye camps in one district.
• Unrestricted funds: money the NGO can use for any of its objects. This includes the general fund and designated funds, which the board has set aside for a purpose but could release.
• Corpus: funds of a capital nature, not meant to be spent. Under the Income-tax Act, 2025, a corpus donation is one made with a specific direction that it form part of the corpus, invested in permitted forms kept specifically for it (Section 339); it sits outside the 85% rule. See corpus and anonymous donations.

The guide recommends an income and expenditure account in three columns: unrestricted funds, restricted funds and the total. Unspent restricted money stays in its fund, to be used for its purpose or returned under the grant agreement.

The cash rules

Cash is where NGOs most often trip over tax law. Under the Income-tax Act, 2025:

Pay staff, suppliers and partners by bank transfer, ask donors to give by UPI, cheque or bank transfer, and keep petty cash small.

Internal controls

Controls protect the money and the people who handle it:

1. Two signatories, or two approvals online, for every payment.
2. Separate duties: the person who records a transaction shouldn’t be the one who approves it or pays it.
3. Reconcile every bank account every month, and have someone other than the bookkeeper check it.
4. Quotes for larger purchases, and no splitting of orders to get under the limit.
5. A small petty cash float, topped up only against vouchers.
6. A fixed asset register, with each asset tagged and checked once a year.
7. Numbered donation receipts, and a record of every grant’s conditions and balance.
8. A monthly comparison of spending against budget, and a quarterly report to the board.
9. Backups and access controls for accounting software, with no shared passwords.

What the auditors check

The income-tax audit (Form 112). The accountant examines the accounts and reports on the matters the Income-tax Act cares about: how much income was applied to the objects and whether the 85% rule was met, accumulations, corpus, anonymous donations, payments to related persons, investments and any business activity. Form 112 replaced both Form 10B and Form 10BB, and distinguishes a “small registered NPO” (regular income up to ₹5 crore, foreign contribution up to ₹10 lakh and income applied outside India up to ₹10 lakh in the tax year) from others. It is due one month before the return, that is by 30 September, and the first is for tax year 2026-27, due in 2027.

The statutory audit (Section 8 companies). The company’s auditor reports to its members on whether the financial statements give a true and fair view, under the Companies Act.

Funders’ checks. CSR teams and government departments often ask for utilisation certificates signed by your CA, confirming that their money was spent as agreed, and some commission their own audits.

Choosing an auditor

• A chartered accountant in practice who is independent: not a trustee, board member or employee, and not their relative. For a Section 8 company, the Companies Act bars an officer or employee from being its auditor (Section 141).
• Experience with NGOs: someone who knows the Income-tax Act’s NGO chapter, fund accounting and, if relevant, FCRA.
• A written engagement letter setting out the scope, the fee and the timetable.
• A timetable that works: books closed by May or June, so the audit isn’t rushed in September.
• A management letter: ask the auditor to tell the board, in writing, what should improve.

Good practice is to review the appointment every few years. The board, not the founder alone, should appoint the auditor and meet them.

Common mistakes

• Keeping no books until the auditor arrives, then rebuilding the year from bank statements.
• Mixing restricted grants with general money, so nobody can say how much of a grant is left.
• Paying in cash because it is quicker.
• Forgetting to deduct tax at source on rent, professionals or contractors.
• Treating the audit as a formality, and never reading the management letter.

The Academy’s Starting an NGO course covers the yearly compliance calendar, and Running a CSR Foundation covers money flows, unspent CSR money and reporting.