Income Tax Assessment of Charitable Trusts, NGOs, Societies and Section 8 Companies

A practical guide to application and accumulation of income, corpus donations, permitted investments, business activities, audit and filing requirements under the Income-tax Act, 2025 for Tax Year 2026-27 onward, with transition references to the Income-tax Act, 1961 where relevant.

Updated: 2 September 2026

1. What counts as income of a charitable institution?

Charitable trusts, societies, Section 8 companies and other eligible non-profit organisations do not receive a blanket exemption merely because they have charitable objects. Tax exemption is conditional on registration, eligible objects and activities, application of income, investment of specified funds, filing, audit and other statutory requirements.

For periods governed by the Income-tax Act, 1961, sections 11, 12 and 13 formed the principal exemption framework. For Tax Year 2026-27 onward, the Income-tax Act, 2025 reorganises the regime for registered NPOs, with the core provisions appearing in Chapter XVII.

For accurate computation, receipts should be classified separately, including voluntary donations, corpus donations, grants, membership receipts, fees, rent, interest, dividends, capital gains, business receipts and other income.

Corpus donations

A contribution received with a specific direction that it shall form part of the corpus requires separate treatment. Corpus receipts and corpus investments should be clearly identifiable in the accounts and records. Spending out of corpus does not automatically obtain the same treatment as ordinary application of current income; statutory restoration or reinvestment conditions may apply.

2. Application of income under section 341

Section 341 of the Income-tax Act, 2025 governs application of income by a registered NPO. Qualifying sums actually paid during the tax year for the charitable or religious purposes in India for which the organisation is registered are dealt with as application, subject to the conditions in that section.

A significant rule applies to donations made by one registered NPO to another: section 341(1)(b) recognises only 85% of such qualifying donation as application. This is different from direct expenditure on the organisation's own charitable or religious purposes.

Examples of charitable application

Depending on the organisation's registered objects and the facts, qualifying expenditure may include education, medical relief, relief of the poor, environmental protection, scholarships, hospitals, schools, welfare programmes, disaster relief and other authorised charitable or religious activities.

Maintain invoices, vouchers, payment records, payroll records, beneficiary records, agreements, utilisation certificates and bank statements so that the purpose and genuineness of expenditure can be demonstrated.

3. 15% deemed accumulation and specific accumulation

15% deemed accumulation - section 343

Under section 343, regular income, after reduction by application under section 341 and income accumulated or set apart under section 342, is treated as deemed accumulated income to the extent of 15% of regular income. Where that deemed accumulated income is invested or deposited, the investment or deposit must be in a mode permitted under section 350.

Specific accumulation - section 342

Section 342 permits a registered NPO to accumulate or set apart part of its regular income for a specified purpose and period. The prescribed statement must be furnished to the Assessing Officer on or before the due date under section 263(1) for furnishing the return for that tax year. The period specified cannot exceed five years.

Accumulated income must be invested or deposited in permitted modes under section 350 or applied for the stated purpose in accordance with section 342. A payment out of section 342 accumulated income to another registered NPO is generally not treated as application of income.

Change of purpose

A registered NPO should not unilaterally divert accumulated funds to a different purpose. Section 342 provides an application mechanism to the Assessing Officer for change of purpose, and permission may be granted for another charitable or religious purpose in India that conforms to the organisation's objects.

4. Important NPO forms under the Income-tax Rules, 2026

Form 108

Form 108 is the electronic statement for a registered NPO exercising the option under section 341(7) in the circumstances prescribed for deemed application, including the statutory case where the required income could not be applied because it was not received during the relevant tax year.

Form 109

Form 109 is the prescribed statement for accumulation or setting apart of regular income under section 342(1). It corresponds to old Form 10. The purpose and period of accumulation must be stated, and the statutory filing deadline must be observed.

Form 112

Form 112 is the audit report under section 348 for registered NPOs. The reporting framework covers recognition or registration, objects, books, donations, corpus, business activities, specified violations, depreciation and other compliance matters.

5. Permitted modes of investment - section 350

Section 350 links the NPO regime to the permitted investment or deposit modes specified in Schedule XVI and any additional modes notified by the Central Government. The permitted framework includes, among other specified modes, Government savings instruments, Post Office Savings Bank accounts and deposits with scheduled banks or qualifying co-operative banking institutions.

Organisations should maintain separate investment records for corpus funds, section 342 accumulated income and other amounts whose tax treatment depends on investment in permitted modes.

6. Corpus funds and restoration rules

Corpus donations should be supported by a clear donor direction and separately recorded. Amounts applied out of corpus are subject to special statutory rules. Under the new framework, qualifying restoration to the corpus can be recognised as application only where the conditions and time limits in section 341 are satisfied.

Maintain a corpus ledger covering opening corpus, corpus donations received, corpus investments, withdrawals or expenditure, restoration or reinvestment, and closing corpus balance.

7. Business undertakings and commercial activities

The Income-tax Act, 2025 separately addresses business undertakings and commercial activity of registered NPOs. Section 344 deals with a business undertaking held as property, while section 345 deals with restrictions relating to business or commercial activities.

Organisations carrying on fee-based or commercial activities should examine whether the activity is consistent with their registered objects, whether specific statutory limits apply, and whether separate books or other records are required.

General public utility objects

Organisations pursuing advancement of an object of general public utility require particular care where activities involve trade, commerce, business or services for consideration. The nature and amount of commercial receipts should be monitored throughout the tax year rather than only at the time of filing the return.

8. Capital gains and acquisition of replacement assets

Capital gains of charitable institutions require separate computation. For earlier years, section 11(1A) of the Income-tax Act, 1961 contained the familiar reinvestment mechanism. For Tax Year 2026-27 onward, the corresponding NPO provisions under the Income-tax Act, 2025 should be applied rather than mechanically using the old section numbering.

The entire capital gain should not automatically be assumed to be taxable merely because an NPO sells a capital asset; the statutory treatment depends on the applicable provision, the amount reinvested and other facts.

9. Depreciation and assets already treated as application

Depreciation requires care where acquisition cost of the same asset has already been claimed as application of income. The current audit framework specifically requires reporting of depreciation claims that may contravene the statutory restriction. Asset registers should therefore reconcile acquisition cost, application claimed and depreciation.

10. Registration, continuity and audit

Section 332 of the Income-tax Act, 2025 covers registration of registered NPOs and expressly recognises public trusts, registered societies and Section 8 companies, including qualifying former section 25 companies deemed registered under the Companies Act, 2013.

Existing approvals and recognitions under the Income-tax Act, 1961 are subject to the transition provisions of the 2025 Act. A charitable organisation applying for provisional registration after 1 April 2026 uses Form 104, while Form 105 is used for specified regular registration or approval applications under the new regime.

Where audit is required under section 348, the organisation must obtain and furnish the prescribed audit report in Form 112 within the applicable statutory time.

11. Transactions with founders, trustees and other specified persons

Private benefit and related-party transactions remain a major exemption-risk area. Under the earlier law, section 13 restricted exemption where income or property was used for specified persons such as founders, substantial contributors, trustees, relatives and certain concerns in which they had substantial interest. Under the new regime, the corresponding provisions applicable to registered NPOs must be reviewed for Tax Year 2026-27 onward.

Maintain an updated register of founders, trustees, key office-bearers, substantial contributors, related persons and connected concerns, and review transactions with them before year-end.

12. How taxable income of a charitable institution is determined

1. Identify all receipts. Reconcile donations, grants, fees, membership income, rent, interest, capital gains, business receipts and other income.
2. Separate corpus receipts. Verify the donor's specific corpus direction and corresponding permitted investment.
3. Compute regular income. Use the applicable statutory computation, not merely the accounting surplus.
4. Determine qualifying application. Identify amounts actually qualifying under section 341 and related provisions.
5. Compute deemed accumulation. Apply section 343 and its 15% limit correctly.
6. Review specific accumulation. If income is accumulated for a specified purpose, comply with section 342 and Form 109.
7. Verify investments. Check corpus and accumulated amounts against section 350 and Schedule XVI.
8. Review business and commercial receipts. Apply sections 344 and 345 where relevant.
9. Check related-party and violation provisions. Identify transactions or conduct that can restrict exemption.
10. Complete audit and filing. File the correct return and prescribed forms for the correct tax year within the due dates.

13. Practical 85% / 15% illustration

Assume a registered NPO has regular income of ₹1 crore and, after applying the statutory provisions, ₹85 lakh is qualifying application. The 15% concept may allow up to ₹15 lakh to fall within deemed accumulation under section 343, subject to the exact statutory computation and investment requirements.

If the NPO additionally wishes to set apart income for a specified future project such as a hospital, school or other qualifying object, it should follow section 342 and furnish Form 109 for the specified purpose and period, not exceeding five years.

14. Common mistakes to avoid

• Treating every donation as a corpus donation without a specific corpus direction.
• Failing to keep corpus investments and records separate.
• Treating expenditure from corpus or borrowed funds as ordinary application without applying restoration or repayment rules.
• Using the old Form 10 instead of Form 109 for section 342 accumulation for the new regime.
• Missing the deadline for Form 108 or Form 109.
• Investing corpus or accumulated funds outside the modes permitted by section 350 and Schedule XVI.
• Ignoring the special 85% treatment for qualifying donations made to another registered NPO.
• Carrying on commercial activities without checking sections 344 and 345 and the organisation's objects.
• Failing to reconcile donations, application and bank records.
• Claiming depreciation without checking whether asset cost has already been treated as application.
• Entering into transactions with founders, trustees or connected persons without reviewing the exemption consequences.
• Filing the wrong form for the wrong assessment year or tax year during the 1961 Act / 2025 Act transition.

15. Transition from the Income-tax Act, 1961

16. Official Income Tax references

17. Conclusion

For Tax Year 2026-27 onward, charitable trusts, NGOs, societies and Section 8 companies covered by the registered NPO regime should base their compliance on the Income-tax Act, 2025 and the Income-tax Rules, 2026. The key operational areas are registration, qualifying application of income, 15% deemed accumulation under section 343, specific accumulation under section 342, Form 108 and Form 109 filing, permitted investments under section 350, corpus accounting, business or commercial activity, related-party controls, audit in Form 112 and timely filing of the return.

The applicable law must always be matched to the relevant assessment year or tax year. Earlier years may continue to be governed by the Income-tax Act, 1961, while Tax Year 2026-27 onward is governed by the new Act subject to the applicable transition provisions.