Law of Trusts
Regulatory Compliance: FCRA, PMLA and Beneficial Ownership
Trusts can hold large sums for unseen beneficiaries, and that makes them attractive to those who wish to hide the source or ownership of money. Two regulatory regimes respond to this. The Foreign Contribution (Regulation) Act, 2010 (FCRA) controls the receipt and use of foreign funds by trusts and other organisations. The Prevention of Money-laundering Act, 2002 (PMLA) and its rules require banks and other reporting entities to identify the beneficial owners of trusts, and bring certain trust service providers within the regime. This note explains both.
1. The FCRA, 2010
The FCRA regulates the acceptance and use of foreign contribution (donations, currency, articles and securities from foreign sources) by individuals, associations and companies, to ensure that such funds do not affect national interest. A trust that wishes to receive foreign contribution must either:
- obtain registration, which permits receipt for defined cultural, economic, educational, religious or social programmes and is valid for five years, renewable; or
- obtain prior permission for a specific contribution from a specific donor for a specific purpose.
The 2020 amendments
Change | Effect |
|---|---|
No transfer of foreign contribution | A recipient may not transfer foreign contribution to any other person or organisation, even another FCRA registered one |
Cap on administrative expenses | Not more than 20 per cent of foreign contribution received in a financial year may be spent on administrative expenses |
Designated bank account | Foreign contribution must be received only in an "FCRA account" opened at the designated branch of the State Bank of India, New Delhi |
Identification | Office bearers, directors and key functionaries must furnish identification, including Aadhaar for Indian nationals |
Public servants | Public servants are barred from receiving foreign contribution |
📖 Noel Harper v Union of India (Supreme Court, 8 April 2022) Held: The 2020 amendments were upheld. There is no fundamental right to receive foreign contribution; Parliament may regulate it strictly in the interest of national sovereignty and public order, and the restrictions on transfer, administrative expenses and the designated account are reasonable. |
A Foreign Contribution (Regulation) Amendment Bill, 2026 was introduced in the Lok Sabha on 25 March 2026, proposing a framework for the government to take over and manage foreign funds and assets of organisations whose registration is cancelled, surrendered or not renewed. Its status should be checked.
2. The PMLA and Beneficial Ownership of Trusts
Under the PMLA and the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, reporting entities such as banks, financial institutions and intermediaries must carry out customer due diligence, including identifying the beneficial owner of any client that is not an individual.
Beneficial owners of a trust
For a trust, the rules require identification of:
- the author of the trust;
- the trustees;
- the beneficiaries with 10 per cent or more interest in the trust (the threshold was lowered from 15 per cent by amendments notified on 7 March 2023); and
- any other natural person exercising ultimate effective control over the trust through a chain of control or ownership.
Trustees must disclose their status to reporting entities when opening accounts or entering transactions, and furnish the documents required for each trustee authorised to transact for the trust.
Non-profit organisations
The 2023 amendments require reporting entities to register the details of non-profit organisation clients, including charitable trusts, on the DARPAN portal of NITI Aayog, and to maintain records for five years after the relationship ends or the account is closed, whichever is later.
Trust service providers
Notifications issued in May 2023 brought certain professionals and service providers within the PMLA as reporting entities when they carry out specified activities for clients, including the creation, operation or management of trusts and acting as, or arranging for another person to act as, a trustee of an express trust. Such persons must themselves carry out due diligence and report suspicious transactions.
3. Other Beneficial Ownership Rules
- Companies Act, 2013: where shares are held by a trust, the provisions on declaration of beneficial interest in shares (Section 89) and significant beneficial owners (Section 90) may require disclosure of the natural persons behind the trust.
- Income tax: trusts must disclose details of authors, trustees and beneficiaries in returns, and charitable entities must report donors.
- Benami law: genuine trusts are outside the definition of benami transaction, but a sham trust used to conceal ownership may be caught (Topic 34).
⚠ Key point Trusts may receive foreign contribution only with FCRA registration (five years, renewable) or prior permission. The 2020 amendments, upheld in Noel Harper (2022), bar transfer of foreign contribution to others, cap administrative expenses at 20 per cent, and require receipt in an FCRA account at the designated SBI, New Delhi branch; an amendment Bill introduced on 25 March 2026 proposes takeover of assets on cancellation. Under the PMLA rules, reporting entities must identify a trust's author, trustees, beneficiaries with 10 per cent or more interest and anyone exercising ultimate effective control, register NPO clients on DARPAN and keep records for five years; since May 2023, professionals acting as trustees of express trusts for clients are reporting entities. |
4. Related Topics and Provisions
- Benami transactions (Topic 34)
- Choosing a vehicle (Topic 46)
- Taxation of charitable and religious trusts (Topic 48)
- Trusts in capital markets (Topic 50)