Permitted Modes of Investment for Trusts: Schedule XVI Explained (Income Tax Act 2025)

A registered non-profit organisation (a charitable or religious trust, society or section 8 company with registration) can invest or deposit its money only in the modes listed in Schedule XVI, plus any further modes the Central Government notifies (section 350). Bank deposits, government securities, Post Office accounts and certain mutual fund units are on the list. An investment outside the list is taxed as specified income at a flat 30% (section 337, Table Sl. No. 4; section 334(1)(a)).

This guide covers what the list contains, which money it applies to, the one-year window for assets that are not on the list, what happens when you get it wrong, and the records the Rules require. Everything below is taken from the Act as amended by the Finance Act, 2026, and the Income-tax Rules, 2026. Reviewed against that text on 10 November 2026.

What does section 350 say about investment of funds by a trust?

Section 350 has two parts:

• Section 350(1): the modes of investing or depositing money under this Part (the Part on registered non-profit organisations) are those specified in Schedule XVI.
• Section 350(2): modes other than those in Schedule XVI are those the Central Government specifies by notification.

So the list is closed unless the Government notifies more. A mode that is neither in the Schedule nor notified is not a permitted mode.

Which money must go into a Schedule XVI mode?

Section 350 is a reference point. Several other sections send specific pools of money to it:

Pool of money	Where the requirement is
Corpus donation (donation given with a specific direction that it forms part of corpus)	Section 339: must be invested or deposited in a section 350 mode maintained specifically for the corpus
Deemed corpus donation (renovation or repair donations for a temple, mosque, gurudwara, church or other notified place, if the trust opts)	Section 340(c)
Accumulated or set-apart income	Section 342(4): invest in a section 350 mode, or apply for the stated purpose
Deemed accumulated income (up to 15% of regular income)	Section 343(1): if invested or deposited, use a section 350 mode
Investing or depositing back money earlier applied from corpus	Section 341(2)(a): counts as application only if put back in a section 350 mode kept specifically for that corpus, within five years from the end of the tax year of application

What are the permitted modes in Schedule XVI?

Paragraph 1 of Schedule XVI lists 32 items. Grouped by type, the common ones are:

Group	Schedule XVI, paragraph 1 item
Bank and post office deposits	(2) Post Office Savings Bank account; (3) account with a scheduled bank or a co-operative society carrying on banking (including co-operative land mortgage and land development banks)
Government paper	(1) savings certificates under the Government Savings Certificates Act, 1959 and other Central Government small-savings securities; (5) securities issued by the Central or a State Government; (6) debentures whose principal and interest are fully and unconditionally guaranteed by the Central or a State Government; (14) transfer of deposits to the Public Account of India
Mutual funds and units	(4) units of the Unit Trust of India; (13) units of a mutual fund referred to in Schedule VII (Table: Sl. No. 20 or 21)
Public sector	(7) investment or deposit in a public sector company; (25) shares in a public sector company; (12) deposits with the Industrial Development Bank of India
Long-term finance bonds	(8) bonds of a financial corporation providing long-term finance for industrial development and eligible for deduction under section 32(e); (9) bonds of a public housing-finance company, also eligible under section 32(e); (10) bonds of a public company providing long-term finance for urban infrastructure; (22) debt instruments of an infrastructure finance company registered with the RBI
Immovable property	(11) investment in immovable property (machinery or plant is excluded, other than plant installed in a building for its convenient occupation, paragraph 2(d))
Housing and urban authorities	(15) deposits with an authority set up by law for housing accommodation or for planning, development or improvement of cities, towns and villages
Market infrastructure and others	(16) equity shares of a depository; (17) specified investment by a recognised stock exchange in a company associated with the securities market; (18) and (19) equity or bonds of specified payment-system companies, including Open Network for Digital Commerce Ltd.; (20) equity shares of an incubatee by an incubator; (21) shares of National Skill Development Corporation; (23) Sovereign Gold Bonds "Stock Certificate"; (24) units of Powergrid Infrastructure Investment Trust
Legacy assets	(26) assets forming part of corpus on 1 June 1973; (27) equity shares of a public company held by a university, educational institution, hospital or medical institution as part of corpus on 1 June 1998, where approved then under section 10(23C) of the 1961 Act; (28) bonus shares on (26) or (27); (29) debentures acquired before 1 March 1983
Other	(30) voluntary contributions received and kept as jewellery, furniture or any other article the Board notifies; (32) funds representing business profits, see below

Item (32) covers funds representing business profits of the tax year starting 1 April 1984 or any later tax year. Where the organisation has other income as well, item (32) does not apply unless it keeps separate books of account for that business. Read the item itself for the full wording before relying on it.

Item (7) has a safety valve. If a public sector company stops being one, shares held stay a permitted investment for three years from that date. Other investments or deposits in it stay permitted until the date they become repayable.

What if the asset is not on the list? The one-year rule

Paragraph 1(31) of Schedule XVI treats as a permitted mode any asset that is not in items (1) to (30), if it is not held for more than one year from the end of the tax year in which it was acquired. In plain terms, a trust that receives or buys a non-listed asset has until the end of the following tax year to sell it or move into a listed mode.

What happens if a trust invests in a mode that is not permitted?

Section 337 lists two relevant items of specified income, taxed at 30% under section 334(1)(a):

Sl. No. (section 337)	Specified income	Taxable in
4	Any investment or deposit made in contravention of section 350, out of any income, accumulated income, deemed accumulated income, corpus, deemed corpus or any other fund	Tax year in which the investment or deposit is made
12	Fair market value of any asset not held in the forms or modes in paragraph 1(1) to (30) of Schedule XVI even after one year from the end of the tax year in which it was acquired	Tax year immediately following the expiry of that one-year period

A corpus donation also loses its character if it is not kept in a section 350 mode (section 339), and a deemed corpus donation that breaks a section 340 condition is separately specified income (Sl. No. 5).

Worked example 1: a deposit placed outside Schedule XVI

Assumptions: a registered trust accumulates Rs 20,00,000 under section 342 in tax year 2026-27. In that year its treasurer places Rs 5,00,000 of it in an instrument that is not in Schedule XVI and not notified under section 350(2). No other facts change.

1. The Rs 5,00,000 is an investment made in contravention of section 350 out of accumulated income (section 337, Sl. No. 4).
2. It is specified income of tax year 2026-27, the year of investment.
3. Tax at 30% = 5,00,000 x 30% = Rs 1,50,000, before any surcharge or cess, which this article does not compute.

Worked example 2: shares held past the one-year window

Assumptions: a trust is gifted unlisted shares in tax year 2026-27 (they are not in items (1) to (30)). Their fair market value is Rs 9,50,000 and the trust still holds them after the window.

Step	Working
Tax year of acquisition	2026-27, ending 31 March 2027
One year from the end of that tax year	31 March 2028
Tax year in which the value becomes specified income (Sl. No. 12)	The tax year immediately following, which is 2028-29
Specified income	Fair market value, Rs 9,50,000
Tax at 30%	9,50,000 x 30% = Rs 2,85,000 (before surcharge and cess)

If the trust had sold the shares and moved the proceeds into a bank deposit by 31 March 2028, the one-year rule would have kept the shares permitted until then and the deposit would be a listed mode.

Real-life example 1: Meena's school trust and a fixed deposit

Meena is treasurer of a charitable school trust. After the 85% application test, the trust has surplus it wants to accumulate under section 342 for a new building in four years. She opens a fixed deposit with a scheduled bank. That is item (3) of Schedule XVI, so it is a permitted mode and nothing special follows. She also notes the amount in the trust's investment records (see below).

Real-life example 2: Ravi's temple trust and repair donations

Ravi's trust receives donations for repair of a temple and opts to treat them as deemed corpus under section 340. Until the repair begins, he keeps the money in a separate Post Office Savings Bank account, item (2) of Schedule XVI. That satisfies section 340(c). Section 340 also requires the corpus to be kept separately identifiable, applied only for the repair, and not given away as a donation. The Rules ask for a record of the modes in which this corpus is held (rule 187(1)(d)(vi)(V)).

What records must a trust keep about investments?

Rule 187 requires a registered non-profit organisation to maintain separate records of money invested or deposited in section 350 modes and of money invested or deposited in other modes, for accumulated income, for corpus donations (current and earlier years) and for deemed corpus donations (rule 187(1)(d)(iii) to (vi)). It must also record immovable and movable properties with cost and registration documents (rule 187(1)(d)(viii)). Records may be kept in written, electronic or digital form (rule 187(2)), normally at the registered office (rule 187(3)), for six years from the end of the relevant tax year (rule 187(5)), longer if an assessment is reopened (rule 187(6)).

Common mistakes

• Treating "a bank" as enough. Item (3) names a scheduled bank or a co-operative society carrying on banking. Check the institution.
• Mixing corpus money with other funds. Section 339 asks for a section 350 mode maintained specifically for the corpus.
• Forgetting the one-year clock on gifted assets such as shares or vehicles not on the list.
• Assuming any mutual fund qualifies. Item (13) refers to the funds in Schedule VII Sl. No. 20 or 21 only.
• Ignoring the related-person angle. A listed mode does not settle who benefits. Income applied directly or indirectly for the benefit of a related person is separate specified income (section 337, Sl. No. 2). "Related person" includes a trustee, the founder, a donor above the section 355 thresholds, their relatives and any concern in which they hold a substantial interest (section 355).
• Not keeping separate records of permitted and other modes, which rule 187 asks for.
• Treating a notified mode as permanent knowledge. Section 350(2) lets the Government add modes, so check for notifications each year.

Quick reference

Point	Rule	Where
Permitted modes	Schedule XVI plus notified modes	Section 350(1), (2)
Non-listed asset	Permitted if not held beyond one year from the end of the tax year of acquisition	Schedule XVI, para 1(31)
Investment outside the modes	Specified income, 30%, taxable in year of investment	Sections 337 (Sl. No. 4), 334(1)(a)
Asset held past one year	Fair market value taxed at 30% in the next tax year	Section 337 (Sl. No. 12)
Record retention	Six years from end of tax year	Rule 187(5)

Where this is in the Act

• Section 350 and Schedule XVI (paragraphs 1 and 2): permitted modes and definitions.
• Sections 339, 340, 341(2)(a), 342(4), 343(1): money that must go into these modes.
• Section 337 (Sl. No. 4 and 12) and section 334(1)(a): 30% on a wrong investment.
• Rule 187: books and records.

A CA who looks after several trusts has a lot to track: which funds are corpus, when each accumulation period ends, and when the one-year window closes on a gifted asset. Finexo's practice management software lets you track such client-wise deadlines and reminders. It does not decide whether a mode is permitted.

For the wider picture, read our guides on taxation of a registered non-profit organisation and registration of trusts. This article is general information, not advice on a specific trust.