Commercial Activities by Charitable Trusts: Sections 345 and 346 (Income Tax Act 2025)

A registered non-profit organisation (trust, society or company registered under the Act) may carry on a commercial activity only on conditions. Under section 345, the activity must be incidental to its objectives and run in separate books. If the organisation works for "any other object of general public utility", section 346 instead requires that the activity be part of actually carrying out that object, that its receipts stay within 20% of the organisation's total receipts for the tax year, and that separate books are kept.

This guide explains which section applies to which trust, how the 20% test works, how the gains are computed and what happens if a condition is missed. It is based on the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Income-tax Rules, 2026 (tax year 2026-27 for the examples). It is information, not advice on any specific trust.

Can a charitable trust carry on business under the Income Tax Act 2025?

Yes, but only within sections 345 and 346. Gains of a commercial activity that these sections permit (and a business undertaking held as property, section 344) form part of the trust's "regular income" under section 335(e). They are computed in the manner prescribed in rule 182. An activity that fails the conditions is a violation, with the consequences described below.

What counts as a "commercial activity" under the Act?

Section 355(e) defines it as any activity in the nature of trade, commerce or business, or rendering any service in relation to trade, commerce or business, for a cess, fee or any other consideration. The definition applies irrespective of how the income is used: applying the surplus to the trust's objects, or retaining it, does not stop the activity being commercial. Fees for seminars, training, publications or consultancy are therefore tested against sections 345 or 346, not assumed to be outside them.

Section 344 covers a separate situation. If the property held by the organisation includes a business undertaking and the income of that undertaking is claimed to be eligible for benefits under this Part, the Assessing Officer can determine that income as per the provisions of the Act.

Which section applies: 345 or 346?

It depends on the object of the organisation. Section 2(23) lists the "charitable purposes": relief of the poor, education, yoga, medical relief, preservation of environment, preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility (clause (g)).

• If the organisation does not carry out the advancement of any other object of general public utility (for example it only runs a school or a hospital), section 345 applies.
• If it carries out advancement of any other object of general public utility, section 346 applies, and section 345 expressly excludes it.

What does section 345 require?

Section 345 says a registered non-profit organisation (other than one covered by section 346) shall not carry out any commercial activity unless both of these hold:

1. the commercial activity is incidental to the attainment of its objectives; and
2. separate books of account are maintained for such activities.

Section 345 sets no percentage cap. The test is whether the activity is incidental to the objectives. The Act does not define "incidental" in these sections, so the facts of each case matter.

What does section 346 require?

Section 346 applies to an organisation carrying out advancement of any other object of general public utility. All three conditions must be met:

1. the activity is undertaken in the course of actually carrying out the advancement of an object of general public utility;
2. the aggregate receipts from the commercial activity or activities do not exceed 20% of the total receipts of the organisation for the relevant tax year; and
3. separate books of account are maintained for such activities.

Side-by-side comparison

Point	Section 345	Section 346
Applies to	Registered non-profit organisations other than those in section 346	Those carrying out advancement of any other object of general public utility
Link to objects	Incidental to attainment of objectives	Undertaken in the course of actually carrying out the object
Receipts cap	None stated	20% of total receipts of the tax year
Separate books	Required	Required
Consequence of breach	Specified violation, section 351(1)(b)	Other violation, section 353(1)(d)

How are the gains of a commercial activity computed?

Rule 182 says the activity is treated as if it were an entity separate from the organisation, separate books are maintained, and the gains for the tax year are computed under Part D of Chapter IV of the Act (the business and profession provisions). Those gains are regular income under section 335(e).

Rule 187(1) also requires organisations whose total income, before giving effect to this Part, exceeds the basic exemption limit (section 347) to maintain books for the business undertaking and for other business, plus a record of income from commercial activities permissible under sections 344, 345 and 346 (rule 187(1)(d)(ii)(IV)).

Worked example 1: how the 20% test works (section 346)

Assumptions: tax year 2026-27, a trust advancing an object of general public utility, and "total receipts" read as all receipts of the trust including the commercial receipts.

Step	Amount (Rs)
Donations and grants	50,00,000
Programme fees	22,00,000
Receipts from commercial activity (publication sales)	8,00,000
Total receipts (50,00,000 + 22,00,000 + 8,00,000)	80,00,000
Limit: 20% of 80,00,000	16,00,000
Commercial receipts as a share of total: 8,00,000 / 80,00,000	10%

10% is within the 20% limit, so condition (b) of section 346 is met. The other two conditions (activity in the course of the object, separate books) still have to be met separately.

Worked example 2: when the cap is crossed

Assumptions: same trust, but other receipts are Rs 62,00,000 and commercial receipts are Rs 18,00,000.

Step	Amount (Rs)
Total receipts (62,00,000 + 18,00,000)	80,00,000
Commercial share: 18,00,000 / 80,00,000	22.5%
Result	Exceeds 20%, section 346(b) not met
Highest commercial receipts for these other receipts: x where x = 20% of (62,00,000 + x), so 0.8x = 12,40,000	15,50,000
Check: 15,50,000 / 77,50,000	20%

What happens if the conditions are not met?

The two sections lead to different consequences.

• Section 345 breach: carrying on a commercial activity in contravention of section 345 is a specified violation under section 351(1)(b). The Principal Commissioner or Commissioner can then pass an order cancelling registration for that tax year and all subsequent tax years, after giving a reasonable opportunity of being heard (section 351(2)).
• Section 346 breach: the words "or 346" were omitted from section 351(1)(b) with effect from 1 April 2026. A breach of section 346 is instead an "other violation" under section 353(1)(d). The organisation's regular income for that tax year, reduced by the expenditure allowed under section 353(3), becomes taxable regular income chargeable under section 334.

Section 353(3) allows only expenditure incurred in India (other than capital expenditure) for the objects, and excludes, among other things, expenditure out of corpus brought forward, out of a loan, or as a contribution or donation to any person. Section 353(4) allows no other set-off or deduction.

Worked example 3: what a section 346 breach can cost

Assumptions: a trust under section 346 breaches the 20% cap in 2026-27. Regular income is Rs 90,00,000. Qualifying expenditure under section 353(3) is Rs 70,00,000. Specified and residual income are ignored here.

1. Regular income: Rs 90,00,000
2. Less qualifying expenditure under section 353(3): Rs 70,00,000
3. Taxable regular income: Rs 20,00,000, charged as per section 334(1)(b) at the rate applicable under other provisions of the Act

Without the breach, the trust would have been tested under the normal rules for application of income. The rate itself is not set out in sections 345 or 346, so it must be read from the other provisions.

Real-life example 1: a school trust and its canteen

Meena's education trust runs a school and does not carry on advancement of any other object of general public utility, so section 345 applies. The trust runs a canteen for students and staff. The canteen serves the school's purpose, so it is arguably incidental to the objective. The trust opens a separate set of books for the canteen, and the gains are computed as if the canteen were a separate entity (rule 182). If the canteen were instead a restaurant open to the public, the incidental test would be hard to meet, and the trust would risk a specified violation.

Real-life example 2: a community trust selling crafts

Ravi's trust promotes local welfare through activities falling under "any other object of general public utility". It sells craft items made in its training programme. Because the sales come out of the programme itself, condition (a) of section 346 is arguably met. The craft sales, however, grew to over a fifth of the trust's total receipts in the year. Condition (b) fails, and the trust faces the section 353(1)(d) consequence for that tax year, even if its books are in order.

Common mistakes

• Treating section 346's 20% cap as if it applied to every trust. Section 345 has no percentage cap.
• Measuring the 20% against profit instead of receipts. Section 346(b) uses aggregate receipts.
• Mixing the commercial activity into the main books. Separate books are a condition in both sections.
• Checking the 20% limit only at year end without looking at the receipts already booked. The test is on the tax year's total receipts, so monitor it through the year.
• Treating fees as non-commercial because the surplus goes to the objects. Section 355(e) ignores how the income is used.
• Assuming the consequence is the same for both sections. Since 1 April 2026 they differ (sections 351 and 353).

Quick reference

Item	Provision
Limit on commercial receipts (section 346 trusts)	20% of total receipts of the tax year
Separate books	Section 345(b), section 346(c), rule 182(b)
Gains treated as	Regular income, section 335(e)
Breach of section 345	Specified violation, section 351(1)(b)
Breach of section 346	Other violation, section 353(1)(d)

Where this is in the Act

• Section 345: commercial activity by registered non-profit organisations
• Section 346: commercial activity where the object is advancement of any other object of general public utility
• Section 344: business undertaking held as property
• Section 335(e): gains of commercial activity as regular income
• Section 2(23)(g): definition of charitable purpose, including general public utility
• Sections 351 and 353: specified violation and other violations
• Section 347 and rule 187: books of account and documents
• Rule 182: computing gains of commercial activities

For the wider picture of how a registered non-profit is taxed, see taxation of a registered non-profit organisation.

For a CA firm with trust clients, the work is tracking which clients run a commercial activity, whether separate books exist and where each stands against the 20% limit during the year. Finexo's practice management software helps you track these client tasks and deadlines. It does not compute the tax or decide whether an activity is incidental.