Specified persons
The four categories of people — an NPO's founder, a substantial contributor, a trustee or manager, or a trustee's relative — whose benefit from NPO income or property costs the NPO its tax exemption.
In plain language
An NPO gets tax exemption because its money is meant for its charitable objects, not for the people who run it. Specified persons is the workbook's name for the insiders that rule protects against.
If an NPO's income or property, in whole or in part, is applied for the benefit of a specified person, the NPO loses its exemption. The workbook lists four categories of specified person: the NPO's author or founder; a substantial contributor to the NPO; a trustee or manager of the NPO; and a relative of a trustee.
The idea is simple. An NPO cannot claim tax-free status while quietly channelling benefits back to the very people who set it up or control it.
How it works
The four categories (Chapter 10, section 10.3):
| Category | Who it covers |
|---|---|
| Author or founder | The person who created the NPO |
| Substantial contributor | Anyone who has given ₹50,000 or more to the NPO by the end of the financial year |
| Trustee or manager | Anyone who runs the NPO |
| Relative | A relative of any trustee |
The consequence. This is one of four listed ways an NPO loses its exemption under Chapter 10. The other three are: converting into a form ineligible for registration; merging with an entity that does not share similar objects and is not itself registered; and, on dissolution, failing to transfer all assets to another registered NPO within 12 months of the month of dissolution.
Why it matters beyond tax. The same idea, that insiders should not benefit from the organisation's money, echoes the SSE's own disclosure rules, which require an NPO to report related party transactions as part of its annual governance disclosures.
A worked example
Illustrative NPO; figures are made up.
Karuna Seva Trust runs a school-feeding programme. Its books show two transactions in one year.
It pays ₹35,000 in market-rate rent to a landlord unconnected to the trust, for a warehouse. This is an ordinary business expense, not a benefit to a specified person.
It also pays ₹2,00,000 in "consultancy fees" to the brother-in-law of its founding trustee, for work that was never actually performed. This second payment benefits a relative of a trustee, a specified person under category four. Because the trust's income was applied for that person's benefit, Karuna Seva Trust risks losing its tax exemption for the year, regardless of how small a share of its total budget the ₹2,00,000 represents.
Had the same ₹2,00,000 gone to an unrelated vendor for genuine consultancy work, no specified-person issue would arise at all.
Why NISM asks about it
Chapter 10 (Taxation), section 10.3, lists specified persons as one of the ways an NPO loses its Section 11 tax exemption, alongside conversion, merger and dissolution failures. Expect a question asking which of four listed people counts as a specified person, or testing the ₹50,000 substantial-contributor threshold specifically.
Common exam traps
- Four categories, not three or five: founder, substantial contributor, trustee/manager, relative of a trustee.
- ₹50,000 is the substantial-contributor threshold, measured by the end of the financial year, not a one-time gift test at the moment of donation.
- Losing exemption over specified persons is one of four triggers in the workbook's list. The others are conversion, an ineligible merger, and a failed asset transfer on dissolution.
- Do not confuse this with anonymous donation: specified persons is about who receives NPO money; anonymous donation is about who gave it.
Where this is taught
Free preparation for NISM Series XXIIIRelated terms
- Anonymous donationA donation whose donor's identity is not available; taxable at a flat 30% when received by a charitable NPO, other than one established wholly for religious purposes.
- Application of incomeUnder Section 11, the requirement that an NPO spend at least 85% of its yearly income on its charitable objects; the shortfall can be accumulated and applied within 5 years under conditions.
- Not for Profit OrganisationA social enterprise that is a charitable trust, charitable society or Section 8 company (or other entity SEBI specifies); it can register on an SSE and raise money mainly through ZCZP instruments.
- Substantial contributorAnyone who has given ₹50,000 or more to an NPO by the end of the financial year — one of four specified-person categories whose benefit from NPO funds costs the NPO its tax exemption.
- General public utility objectThe widest limb of charitable purpose; where an NPO relies on it, income from any trade or business activity must not exceed 20% of its total receipts for the year, or the exemption is lost.