Published 19 October 2026
Registration makes a charity eligible for exemption; it does not make its income exempt. What escapes tax is the income the charity actually spends on its objects in the year, plus a limited amount it is allowed to keep. The rest is taxed, and some of it is taxed at a flat 30 per cent with no deductions at all. The difficult cases are the ordinary ones: a grant that arrives in the last week of March, a building fund that takes four years to spend, a donation passed on to another charity, a hall let out to a relative of a trustee. This guide sets out the 85 per cent rule, deemed application and accumulation for up to five years, under both Acts, as they stand on 19 October 2026.
Which Act governs which year
Under section 536(2) of the Income-tax Act, 2025, the 1961 Act governs financial year 2025-26 (assessment year 2026-27) and earlier. Tax year 2026-27 onwards is governed by Part B of Chapter XVII of the 2025 Act (sections 332 to 355) and the Income-tax Rules, 2026.
| Subject | 1961 Act | 2025 Act |
|---|---|---|
| What income is exempt | s.11(1)(a), (b), s.12(1) | s.335 (regular income), s.336 (taxable regular income) |
| Corpus donations | s.11(1)(d), Explanation 3A | ss.338(b), 339, 340 |
| What counts as application | s.11(1), Explanations 2 to 5, s.11(6), Explanation to s.11 | s.341(1) to (4) |
| Deemed application (income not received, or other reason) | Explanation 1(2) to s.11(1), s.11(1B); Form 9A | s.341(5) to (8); Form No. 108 under rule 184 |
| Accumulation for up to five years | s.11(2), (3), (3A); Form 10 | s.342; Form No. 109 under rule 185; change of purpose in Forms No. 110 and 111 under rule 186 |
| 15 per cent set apart | s.11(1)(a) | s.343 (deemed accumulated income) |
| Permitted investments | s.11(5), s.13(1)(d) | s.350 and Schedule XVI |
| Business income | s.11(4), (4A), proviso to s.2(15) | ss.344, 345, 346; rule 182 |
| Benefit to related persons | s.13(1)©, (2), (3) | s.337 (Table: Sl. No. 2), s.355(h); rule 183 |
| Flat 30 per cent tax | s.115BBC, s.115BBI | s.334(1)(a) read with s.337 |
Under the 1962 Rules, both Form 9A and Form 10 are prescribed by rule 17 (substituted by Notification No. 96/2022 from 1 April 2023). Under the 1961 Act, section 10(23C) institutions follow the same pattern through the third proviso to section 10(23C) and its Explanations.
The 85 per cent rule
Under the 2025 Act
The 2025 Act starts from regular income. Section 335 defines it as (a) income from the charitable or religious activity for which the organisation is registered, (b) and © income from property, deposits and investments held for those purposes, (d) voluntary contributions, and (e) gains of permitted commercial activity. Corpus donations are excluded by section 338(b).
Section 336 then fixes the taxable regular income:
“(a) nil, where 85% or more of the regular income of such tax year has been applied as per provisions of section 341 or accumulated under section 342 for charitable or religious purposes, in such tax year as per the provisions of this Part; and (b) in any other case, 85% of the regular income for such tax year as reduced by its application for charitable or religious purposes as per provisions of section 341 or accumulation thereof under section 342 in such tax year as per the provisions of this Part.”
The remaining 15 per cent is deemed accumulated income under section 343(1). It needs no statement and has no time limit, but where it is invested it must be in a mode permitted by section 350. Section 343(2) says it is not “accumulated income” for the purposes of section 342.
Under section 334(1), the tax on a registered non-profit organisation is the aggregate of 30 per cent on specified income and the normal rates on taxable regular income and residual income (income outside regular and specified income: section 355(j)).
As an illustration with assumed figures: if regular income is ₹100 lakh and ₹80 lakh is applied, with nothing accumulated under section 342, the 85 per cent test fails, and taxable regular income is ₹85 lakh less ₹80 lakh, or ₹5 lakh. If ₹5 lakh more is applied, or accumulated under section 342 by filing Form No. 109 in time, taxable regular income is nil.
Under the 1961 Act
Section 11(1)(a) excludes income from property held under trust “to the extent to which such income is applied to such purposes in India” and, where accumulated or set apart, “to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent”. Voluntary contributions other than corpus are treated as such income by section 12(1). The arithmetic is the same: apply 85 per cent, or accumulate the shortfall under section 11(2).
What counts as application
Section 341(1) of the 2025 Act allows as application (a) any sum applied for the charitable or religious purpose in India for which the organisation is registered, “where such sum is paid during the tax year”, and (b) 85 per cent of a donation made to another registered non-profit organisation. The proviso to clause (a) applies section 35(b)(i) and section 36(4) to (7): the 30 per cent disallowance for failure to deduct tax at source, and the bar on payments over ₹10,000 a day otherwise than through specified banking or online modes. The 1961 Act reaches the same results through Explanations 3 and 4(iii) to section 11(1) and the Explanation at the end of section 11.
Section 341 then excludes or defers:
- Corpus, loans and accumulated income. An application out of corpus, a loan or borrowing, accumulated income, specified income or deemed accumulated income is not application (s.341(4)). The amount becomes application in the year it is invested back into corpus, or the loan is repaid, but only within five years from the end of the year of the original application, only where that application was made after 31 March 2021, and only if it involved no violation (s.341(2)).
- No double benefit. Depreciation on an asset whose cost was claimed as application is not allowed, nor is any set-off of excess application of earlier years (s.341(3)(a), (b)).
- Corpus gifts. A corpus donation to another registered non-profit organisation is not application (s.341(3)©).
- Capital gains. Where the net consideration on transfer of a capital asset held under trust is used to acquire another such asset, the capital gain is deemed applied to the extent section 341(9) allows, as under section 11(1A) of the 1961 Act.
Deemed application: income not received, or not spent in time
Where less than 85 per cent of regular income is applied, section 341(5) allows the organisation to treat the shortfall, or part of it, as deemed application at its option. Section 341(6) fixes when it must then actually be applied:
- if the shortfall arose because the income was not received in the year, during the year of receipt or the following year;
- for any other reason, in the tax year immediately following.
The option is exercised in Form No. 108, “on or before the due date specified under section 263(1) for furnishing the return of income”, electronically under digital signature or electronic verification code (rule 184). Any deemed application not actually applied within the section 341(6) period becomes specified income, taxed at 30 per cent in the year by which it had to be applied (s.337, Table: Sl. No. 13).
The 1961 counterpart is clause (2) of Explanation 1 to section 11(1), with the option in Form 9A. The difference is the deadline: the 1961 option must be exercised “at least two months prior to the due date specified under sub-section (1) of section 139”. Income not applied in the allowed period is deemed income under section 11(1B) and is specified income under section 115BBI(b).
Accumulation for up to five years
The statement
Section 342(1) allows a registered non-profit organisation to “accumulate or set apart any part of its regular income” by furnishing a statement to the Assessing Officer, on or before the due date under section 263(1), stating “the purpose and period, not exceeding five years”. The statement is Form No. 109, furnished electronically by DSC or EVC (rule 185). The accumulated money must be invested or deposited in the modes permitted by section 350, or applied for the stated purposes (s.342(4)). Time during which a court order or injunction prevents application is excluded from the five years (s.342(3)).
The 1961 counterpart is section 11(2), with the statement in Form 10. Section 11(2)© requires it to be furnished “at least two months prior to” the section 139(1) due date, and section 13(9) withdraws the benefit where the statement, or the return, is not furnished by the due date.
When the accumulated income becomes taxable
Under the 2025 Act, any portion of accumulated income becomes specified income, taxed at 30 per cent, in these cases (s.337 Table):
| Sl. No. | Event | Year of tax |
|---|---|---|
| 6 | Applied to purposes other than those for which it was accumulated | Year of such application |
| 7 | Ceases to be accumulated or set apart | Year it ceases |
| 8 | Not applied within the accumulation period | The last of the tax years of the period |
| 9 | Credited or paid to another registered non-profit organisation | Year of credit or payment |
Section 342(2) adds that a payment to another registered non-profit organisation out of accumulated income is not application. The 1961 Act has the same structure in section 11(3), with the tax at 30 per cent under section 115BBI(b).
Changing the purpose
Under section 342(5) and (6), the organisation may apply to the Assessing Officer to apply accumulated income to other charitable or religious purposes in India in conformity with its objects. Rule 186 prescribes Form No. 110 for the application and Form No. 111 for the Assessing Officer’s order. Section 11(3A) of the 1961 Act allowed the change only where “due to circumstances beyond the control” of the trust the income could not be applied as stated; section 342(5) contains no such condition. On dissolution, the Assessing Officer may allow accumulated income to be applied to another registered non-profit organisation in the year of dissolution (s.342(7)).
Accumulations that cross 1 April 2026
An accumulation made under section 11(2) for financial year 2024-25 with a five-year period, or a Form 9A option for financial year 2025-26 that must be applied in 2026-27, will fall due for application in tax years governed by the 2025 Act. Section 536(2)(h), as substituted by the Finance Act, 2026, deals with this: where a sum was not included in total income for a tax year beginning before 1 April 2026 and would have been included in a later year under the repealed Act “on account of violation of such conditions or for any other reason”, it is deemed to be income of that later year and included under the same head. An unspent 1961 accumulation is therefore taxed in the year the 1961 Act would have taxed it, under the 2025 Act’s assessment.
Due dates for these forms
| Year | Governing Act | Form | Due by |
|---|---|---|---|
| FY 2025-26 (AY 2026-27) | 1961 Act | Form 9A, Form 10 | At least two months before the s.139(1) due date |
| Tax year 2026-27 | 2025 Act | Form No. 108, Form No. 109 | On or before the s.263(1) due date (31 October 2027 for an organisation whose accounts must be audited, under s.263(1)© Table: Sl. No. 2) |
For assessment year 2026-27, CBDT Circular No. 07/2026 dated 28 September 2026 extended the return due date for audit cases from 31 October 2026 to 21 November 2026. The circular speaks of the return and the audit report only; it does not mention Forms 9A and 10. Measured from either date, the two-month window closed before 19 October 2026 (on 31 August or 21 September 2026).
Commercial activities
Section 345 bars a registered non-profit organisation from carrying on any commercial activity unless it is incidental to its objectives and separate books are kept. For an organisation advancing “any other object of general public utility”, section 346 adds that the activity must be undertaken in the course of actually carrying out that object, and its aggregate receipts must not exceed 20 per cent of total receipts of the year. Rule 182 computes the gains as if the activity were a separate entity, under Part D of Chapter IV.
The consequences differ. A contravention of section 345 is a specified violation under section 351(1)(b) and can lead to cancellation. The Finance Act, 2026 omitted the words “or 346” from that clause from 1 April 2026; a contravention of section 346 instead makes the whole regular income, less specified expenditure, taxable under section 353(1)(d).
In Assistant Commissioner of Income Tax (Exemptions) v. Ahmedabad Urban Development Authority (Supreme Court, 19 October 2022), a batch of appeals concerned development authorities, housing boards, regulators such as ICAI, trade promotion bodies, cricket associations and private trusts claiming exemption under the 1961 Act as advancing general public utility. The Court held that such an entity may carry on trade or business in the course of achieving its object, provided the receipts stay within the quantitative limit (now 20 per cent of total receipts), and that charges “on cost-basis or nominally above cost” are not trade or business at all; only charges “markedly or significantly above the cost” are. It held that the requirement of separate books in section 11(4A) exists to show the limit has not been breached, and that the test must be applied year by year. The Tribune Trust’s advertisement income was held to be business receipts. On a miscellaneous application, the Court clarified on 3 November 2022 that the conclusions apply to the years before it, and that for other years the authorities must apply the declared law to the facts of each year. Section 346 restates the 20 per cent limit in the 2025 Act.
Related persons, anonymous donations and investments
- Related persons. Income applied directly or indirectly for the benefit of a related person is specified income (s.337, Table: Sl. No. 2). Rule 183 lists the cases (loans without adequate security or interest, property made available without adequate rent, excessive salary, goods or services without adequate consideration, purchases above or sales below adequate consideration, diversion of income or property over ₹1,000, and investment in a concern in which a related person has a substantial interest) and values the benefit. Section 355(h) defines related persons, including a donor whose contribution in the year exceeds ₹1,00,000 or in aggregate exceeds ten lakh rupees, matching section 13(3)(b) of the 1961 Act as substituted from 1 April 2025.
- Anonymous donations above the higher of ₹1,00,000 or 5 per cent of total donations are specified income (s.337, Table: Sl. No. 1), with the same exclusions for wholly religious organisations as section 115BBC(2).
- Investments. Investments outside section 350 are specified income (Sl. No. 4), and so is the fair market value of an asset not held in a Schedule XVI mode one year after the end of the year of acquisition (Sl. No. 12).
What to have ready at the year end
- Regular income by the five heads of section 335, with corpus donations separated and invested in section 350 modes.
- A list of payments made in the year for the objects, separating those out of corpus, loans or accumulated income.
- The 85 per cent computation, and the shortfall, if any, with its reason (income not received, or other).
- For each shortfall to be covered, a decision between Form No. 108 and Form No. 109, with the purpose and the period (up to five years) for Form No. 109.
- The investment register for accumulated and deemed accumulated income.
- A register of related persons and transactions with them, as rule 187 requires.
- Separate books for each commercial activity, and the ratio of its receipts to total receipts.
Signing, and what can be changed
Forms No. 108 and 109 are filed electronically under digital signature or EVC (rules 184(2) and 185(2)), on the e-filing portal; the portal’s help pages for these forms could not be retrieved for this guide, and screen-level steps are not given. The purpose of an accumulation can be changed only by an order in Form No. 111 on an application in Form No. 110. Neither rule provides for revising a Form No. 108 or 109 once the due date has passed.
The procedure in order
- Compute regular income for the year under section 335, excluding corpus.
- Measure application under section 341, excluding applications from corpus, loans and accumulations.
- If application is below 85 per cent, choose deemed application (Form No. 108) or accumulation (Form No. 109), or both, for the shortfall.
- File the form by the section 263(1) due date (for 1961 years, Form 9A or Form 10 at least two months before the section 139(1) due date).
- Invest accumulated and deemed accumulated income in section 350 modes.
- Track each accumulation to its last year, and each deemed application to its deadline; apply for a change of purpose in Form No. 110 if needed.
- Report the computation in the return, where unspent amounts become specified income at 30 per cent.
The next guide covers the books a registered charity must keep, the audit report in Form No. 112 (Forms 10B and 10BB under the 1962 Rules), and the return in ITR-7.