A Practical Approach to Reserve Fund and Other Types of Funds

The Maharashtra Co-operative Societies Act, 1960 applies to both profit-oriented and not-for-profit societies. Co-operative housing societies fall under the latter category. In such societies, any surplus—defined as the excess of income over expenditure—is not considered 'profit'. This surplus typically remains in the society’s bank account or is invested in fixed deposits.

Section 66 of the Act mandates that 25% of profits be transferred to the reserve fund, which is relevant only for profit-making societies that declare dividends to shareholders. In those cases, the reserve fund allocation precedes dividend calculations.

However, for housing societies, which operate on a not-for-profit basis, it makes no sense to earmark surplus funds under specific fund names. Most housing societies do not maintain separate fixed deposits for each fund. In practice, the concept of 'funds' in financial statements often serves more as a presentational tool than a reflection of actual financial segregation. Attempts to reconcile the total of such funds with the sum of fixed deposits frequently prove unsuccessful.

Presenting the surplus or deficit directly in the balance sheet—without linking it to arbitrary fund labels—would offer a clearer and more accurate financial picture.

There should be distinct versions of the Co-operative Societies Act—one tailored for profit-making societies and another for not-for-profit entities. In the context of not-for-profit societies, terms such as 'surplus' and 'deficit' should not be equated with 'profit' or 'loss'. The conventional notions of profit and loss are not applicable to societies that do not operate with a profit motive.

All About Sinking Fund

Every building has a defined lifespan—typically around 40 years from its construction date. Once it nears or reaches the end of this period, undertaking civil repairs becomes highly impractical. At that stage, the only viable option is to demolish the existing structure and build a new one. To finance this reconstruction, a sinking fund is established and maintained for this very purpose.

Estimating the cost of reconstructing a building 40 years into the future poses a significant challenge, primarily due to the impact of inflation over time.

According to Bye-law 13, societies are permitted to collect 0.25% of the construction cost annually as a sinking fund. For instance, if the construction cost is ₹2,000 per square foot and your flat measures 800 square feet, your yearly contribution would be ₹2,000 × 800 × 0.0025 = ₹4,000.

However, when inflation is factored in, this amount becomes quite minimal and insufficient to cover future reconstruction expenses. Despite this limitation, it remains mandatory to collect the sinking fund. Moreover, the collected amount must be placed in a separate fixed deposit account to ensure proper financial planning.