Taxation of a Registered Non-Profit Organisation: Regular Income, 85% Application and 30% Specified Income (Income Tax Act 2025)

Under the Income Tax Act 2025, a registered non-profit organisation (a trust, society or other organisation that holds a valid registration for charitable or religious purposes) pays no tax on its regular income if it applies, or sets aside, at least 85% of it for its charitable or religious purposes in the tax year (section 336). Separately, a list of problem items called specified income is taxed at a flat 30% (section 334(1)(a)). Anything else is taxed under the normal provisions of the Act.

This guide explains the three buckets of income, how the 85% test works, what "application", "accumulation" and "deemed accumulation" mean, and which forms to file. The law is as amended by the Finance Act, 2026, applicable from 1 April 2026 (tax year 2026-27), and every figure below is traced to the Act or the Income-tax Rules, 2026. This is information, not tax advice.

How is a registered non-profit organisation taxed under the Income Tax Act 2025?

Section 334(1) says the tax payable on the organisation's total income is the sum of two amounts:

• 30% on its specified income for the year; and
• tax at the rate that applies under other provisions of the Act on its taxable regular income and its residual income.

Section 334(2) adds that this Chapter overrides the rest of the Act, other than sections 96 to 98. The rate that applies to taxable regular income and residual income is set elsewhere in the Act and is not covered in this post.

What counts as regular income of a registered non-profit?

Section 335 lists five items. Regular income is:

1. income from the charitable or religious activity for which the organisation is registered (for example, fees charged by a school it runs);
2. income from property, deposits or investments held wholly for charitable or religious purposes;
3. income from property, deposits or investments held partly for charitable and religious purposes, as referred to in section 332(2)(b)(ii);
4. voluntary contributions received; and
5. gains of a commercial activity that sections 344, 345 and 346 permit, computed as prescribed.

Two kinds of money are kept out of regular income by section 338: income applied outside India where the Board has directed by general or special order that it is not to be included (for bodies created before 1 April 1952 for charitable or religious purposes, or created on or after that date for charitable purposes where the foreign application promotes international welfare in which India is interested), and corpus donations covered by section 339.

How are gains of a commercial activity computed?

Rule 182 requires three things for item 5 above: the commercial activity is treated as if it were a separate entity, separate books of account are kept for it, and its gains are computed under Part D of Chapter IV of the Act.

What is the 85% rule, and when is taxable regular income nil?

Section 336 sets the test. Taxable regular income is:

• nil, if 85% or more of regular income has been applied under section 341 or accumulated under section 342 for charitable or religious purposes in the tax year; and
• otherwise, 85% of regular income minus the amount applied or accumulated in that year.

The first bullet is a threshold, the second is a calculation.

What is "application of income" under section 341?

Section 341(1) allows two kinds of sums as application:

• any sum paid in the tax year for the charitable or religious purpose in India for which the organisation is registered (sections 35(b)(i) and 36(4) to (7) apply to such a sum); and
• 85% of the sum paid as a donation to another registered non-profit organisation.

Section 341(2) also counts, as application, money put back into the permitted modes after being used from corpus, and repayment of a loan or borrowing that was used for the purpose. Both must be done within five years from the end of the tax year of the original application, the original application must have been made after 31 March 2021, and there must have been no violation of this Part (or the matching old-law provisions) for that application.

What is not allowed as application?

Section 341(3) and (4) block the following:

• depreciation or any other allowance on an asset whose acquisition was already claimed as application, in the same or any other tax year;
• carrying forward excess application from earlier years;
• a corpus donation paid to another registered non-profit organisation; and
• application out of corpus, loan or borrowing, accumulated income, specified income or deemed accumulated income (subject to the section 341(2) exceptions above).

Do capital gains from selling a charitable asset count as application?

Yes, in the cases section 341(9) describes. For property held under trust wholly for charitable or religious purposes, if the whole net consideration is used to buy another asset to be held the same way, the whole capital gain is deemed application. If only part is used, the deemed application is the amount used minus the cost of the transferred asset, if positive. For property held only partly for such purposes, the same logic applies to an "appropriate fraction" of the gain. Net consideration means the sale value minus expenses wholly and exclusively connected with the transfer (section 341(10)).

What if the organisation could not apply 85% in the year?

There are two routes, and the organisation chooses which to use.

Option 1: Deemed application (section 341(5) to (8))

If the amount applied in India is below 85% of regular income, the shortfall, or any part of it, may be treated as deemed application at the organisation's option. The deemed amount must then actually be applied for its objects in India:

• in the tax year in which the income is received or the next one, if the shortfall is because some income was not received in the year it was derived (section 341(6)(a)); or
• in the tax year immediately after the year the income was derived, for any other reason (section 341(6)(b)).

The option is exercised in Form No. 108, electronically under a digital signature or electronic verification code, on or before the return due date under section 263(1) (section 341(7), rule 184).

Option 2: Accumulate or set apart income (section 342)

The organisation may accumulate or set apart part of its regular income by furnishing a statement in Form No. 109 to the Assessing Officer, again on or before the section 263(1) due date. The statement must give the purpose and a period not exceeding five years (section 342(1), rule 185). The accumulated income must be invested or deposited in a mode permitted under section 350 (Schedule XVI), or applied for the stated purpose (section 342(4)). Any period during which application is blocked by a court order or injunction is excluded from the five years (section 342(3)).

To change the purpose of an accumulation, apply in Form No. 110. The Assessing Officer may allow application to other charitable or religious purposes in India that fit the organisation's objects, and does so in Form No. 111 (section 342(5) and (6), rule 186). If the organisation is dissolved, the Assessing Officer may allow the accumulated income to go to another registered non-profit organisation on application (section 342(7)).

What is deemed accumulated income under section 343?

After deducting application (section 341) and accumulation (section 342) from regular income, whatever remains, up to 15% of regular income, is treated as deemed accumulated income. If that money is invested or deposited, it must go into a mode permitted under section 350. Deemed accumulated income does not count as accumulated income for section 342 (section 343(2)), so it cannot be used to claim the 85% test.

Worked example 1: the 85% test with Rs 1 crore of regular income

Assumptions for tax year 2026-27: Meena Education Society is a registered non-profit with regular income of Rs 1,00,00,000 (Rs 1 crore) from school fees and donations. There is no specified income. 85% of regular income is Rs 85,00,000.

Scenario	Applied under s.341	Accumulated (Form 109)	Treated as deemed application (Form 108)	Taxable regular income
A	Rs 88,00,000	Nil	Nil	Nil (88 lakh is at least 85 lakh)
B	Rs 60,00,000	Nil	Nil	Rs 85,00,000 − Rs 60,00,000 = Rs 25,00,000
C	Rs 60,00,000	Nil	Rs 25,00,000	Nil: application becomes Rs 85,00,000. The Rs 25,00,000 must be applied by the next tax year.
D	Rs 60,00,000	Rs 25,00,000	Nil	Nil: Rs 60,00,000 + Rs 25,00,000 = Rs 85,00,000. Applied within the period stated in Form 109.

In scenario A, the leftover is Rs 1,00,00,000 − Rs 88,00,000 = Rs 12,00,000. This is below 15% of regular income (Rs 15,00,000), so the whole Rs 12,00,000 is deemed accumulated income under section 343, and if invested it must go into a section 350 mode.

The tax rate on any taxable regular income (the Rs 25,00,000 in scenario B) comes from other provisions of the Act, so it is not computed here.

What is specified income, and why is it taxed at 30%?

Section 337 lists 13 situations that look like misuse of the exemption, or a break in its conditions. Each becomes specified income in the year shown in column C of the table. In short:

Sl. No.	Specified income (section 337)	Taxed in tax year
1	Anonymous donations above the higher of Rs 1,00,000 or 5% of total donations received in the year (organisations created wholly for religious purposes, or wholly for charitable and religious purposes, are outside this item, except that the second carve-out does not cover anonymous donations directed to a university, educational institution, hospital or medical institution that the organisation runs)	Year of receipt
2	Income applied, directly or indirectly, for the benefit of a related person (as prescribed)	Year of application
3	Income applied outside India in breach of section 338(a)	Year of application
4	Investment or deposit made against section 350	Year of investment or deposit
5	Deemed corpus donation where a section 340 condition is broken	Year of violation
6	Accumulated income applied to a purpose other than the one it was accumulated for	Year it is so applied
7	Accumulated income that ceases to be accumulated or set apart as per section 342(1)	Year it ceases
8	Accumulated income not applied within the period of accumulation	Last of the years for which it was accumulated
9	Accumulated income credited or paid to another registered non-profit organisation	Year of credit or payment
10	Income applied to purposes other than those the organisation is registered for	Year of such application
11	Income of a business undertaking determined by the Assessing Officer under section 344 above the income in its books	Year to which the income relates
12	Fair market value of an asset not held in the modes in paragraph 1(1) to (30) of Schedule XVI, even after one year from the end of the acquisition year	Year immediately after the limitation period in column B
13	Deemed application (section 341(5)) not actually applied in India within the section 341(6) period	Year by which the application was due

Who is a "related person" for item 2?

Section 355(h) names: the author or founder; anyone whose contribution exceeds Rs 1,00,000 in the year or ten lakh rupees in aggregate up to the end of that year; a member of the family where the author, founder or such contributor is a HUF; any trustee or manager; relatives of the author, founder, HUF member or trustee; and any concern in which any of these has a substantial interest.

Rule 183 sets out when income is treated as applied for their benefit. These include lending money or property without adequate security or interest; letting property for use without adequate rent; paying a salary or allowance above what is reasonable; providing goods or services without adequate consideration; buying from them for more, or selling to them for less, than adequate consideration; diverting income or property above Rs 1,000; and keeping funds invested in a concern where a related person has a substantial interest. The amount of specified income is the value of the benefit or facility given free or at a concessional rate (rule 183(2)).

Worked example 2: related-person benefit taxed at 30%

Assumptions for tax year 2026-27: Ravi is a trustee of a registered charitable trust. His brother Suresh (a relative under section 355(h)(v)) uses a hall owned by the trust for coaching classes for all 12 months. Adequate rent for the hall is Rs 40,000 a month. The trust charges Suresh Rs 10,000 a month.

Step	Working	Amount
1. Adequate rent for the year	Rs 40,000 × 12	Rs 4,80,000
2. Rent actually charged	Rs 10,000 × 12	Rs 1,20,000
3. Value of benefit (rule 183(2))	Rs 4,80,000 − Rs 1,20,000	Rs 3,60,000
4. Tax at 30% on specified income (section 334(1)(a))	Rs 3,60,000 × 30%	Rs 1,08,000

The Rs 1,08,000 is the base figure at 30%. This post does not cover surcharge or cess, so those are not included.

Worked example 3: anonymous donations above the limit

Assumptions for tax year 2026-27: a registered charitable society that is not covered by the section 337 Sl. No. 1 carve-outs receives total donations of Rs 40,00,000, of which Rs 5,00,000 is anonymous.

Step	Working	Amount
1. 5% of total donations	Rs 40,00,000 × 5%	Rs 2,00,000
2. Excluded limit (higher of Rs 1,00,000 and step 1)	Rs 2,00,000 is higher	Rs 2,00,000
3. Anonymous donations above the limit	Rs 5,00,000 − Rs 2,00,000	Rs 3,00,000
4. Tax at 30%	Rs 3,00,000 × 30%	Rs 90,000

This reads the "up to" limit as an exclusion with only the excess taxed, which follows the wording of the table. If your numbers sit close to the limit, check the exact reading against the section text before filing.

Real-life examples

Ravi's trust sells a plot and buys another

A trust holds a plot wholly for charitable purposes. It sells the plot for a net consideration of Rs 80,00,000. The cost of the plot (as ascertained for sections 72 and 73, with improvements) is Rs 30,00,000, so the capital gain, as assumed here, is Rs 50,00,000. The trust buys a new plot for Rs 60,00,000 to be held the same way. Because only part of the net consideration is used, the deemed application is the amount used minus cost: Rs 60,00,000 − Rs 30,00,000 = Rs 30,00,000 (section 341(9)(a)(ii)). Had it used the whole Rs 80,00,000, the whole Rs 50,00,000 gain would be deemed application (section 341(9)(a)(i)).

A temple trust receives renovation donations

A temple trust gets donations for repairing the temple building. Under section 340, at its option, these can be treated as corpus if it keeps the money separately identifiable, uses it only for that repair, invests it in a section 350 mode, and does not use it to make donations to anyone. If it later breaks any one of these conditions, the amount becomes specified income (Sl. No. 5) in the year of violation. Rule 187(1)(d)(vi) requires a separate record of such donations, including donor name, address, PAN and Aadhaar where available.

Meena's society runs a shop on the side

A registered society also runs a canteen as a commercial activity that sections 344 to 346 permit. Under rule 182, it must treat the canteen as a separate entity, keep separate books, and compute the gains under Part D of Chapter IV. Those gains then count as regular income under section 335(e), and are tested in the 85% calculation like any other regular income.

Does a registered non-profit need an audit and a return?

Yes, once its total income, before applying this Part, exceeds the basic exemption limit (the maximum amount not chargeable to tax in a tax year). Three duties follow:

• Books: keep books of account and documents as prescribed (section 347, rule 187).
• Audit: get the accounts audited by an accountant and furnish the audit report in Form No. 112, one month before the section 263(1) return due date (section 348, rule 188).
• Return: file the return of income under section 263(1)(a)(iii) and (2), within the time limit in section 263(1)(c) or 263(4) (section 349).

Can registration be cancelled for a violation?

Yes. Section 351(1) lists specified violations: income applied other than for its objects; commercial activity in breach of section 345; application for private religious purposes; application for a particular religious community or caste (for a charitable organisation created after the Act began, other than Scheduled Castes, Scheduled Tribes, backward classes, women and children); an activity that is not genuine or breaks the registration conditions; non-compliance with another law as referred to in section 332(7)(a), once final or undisputed; and false or incorrect information in the registration application. Under section 351(2), the Principal Commissioner or Commissioner may, after a hearing, cancel registration for that tax year and all later years. The order must be passed within six months from the end of the quarter in which the first notice is issued (section 351(3)).

What books must a registered non-profit keep?

Rule 187 requires the books and documents listed under section 347 to be kept at the registered office, or at another place in India approved by a management resolution, in which case the Assessing Officer must be told in writing within seven days. They may be kept in written, electronic or digital form. The retention period is six years from the end of the relevant tax year, and longer if an assessment is reopened under section 279 (until the reopened assessment becomes final). The records include income by category, application in India and outside India, deemed application, accumulations, investments in section 350 modes and other modes, corpus donations, loans, properties, and dealings with related persons.

Common mistakes

1. Missing the Form 108 or Form 109 date. Both are due by the section 263(1) return due date for the tax year. Without the form, the shortfall is not deemed application or accumulation.
2. Counting accumulated or specified income as application. Section 341(4) says application out of accumulated income, corpus, loans (outside the 341(2) exceptions), specified income or deemed accumulated income is not application for the year.
3. Treating a donation to another registered non-profit as fully applied. Only 85% of it counts (section 341(1)(b)), and a corpus donation to another organisation does not count at all (section 341(3)(c)).
4. Investing outside Schedule XVI modes. An investment or deposit made against section 350 is specified income (Sl. No. 4) taxed at 30%.
5. Leaving accumulated income unused beyond the stated period. The balance becomes specified income in the last year of the accumulation period (Sl. No. 8).
6. Charging concessional rent or paying high salaries to related persons. Rule 183 turns the value of the benefit into specified income.

Quick reference: forms and time limits

What	Form	When	Reference
Option to treat shortfall as deemed application	Form 108	On or before the section 263(1) return due date	Section 341(7), rule 184
Statement to accumulate or set apart income (up to 5 years)	Form 109	On or before the section 263(1) return due date	Section 342(1), rule 185
Application to change the purpose of accumulation	Form 110 (order in Form 111)	On application (no date given in the rule)	Section 342(5), rule 186
Deemed application to be actually applied	Not a form	Year income is received or the next, if it was not received in the year; next year in other cases	Section 341(6)
Keep books and documents	Not a form	Six years from the end of the tax year	Rule 187(5)

How Finexo can help a CA firm with non-profit clients

Trusts and societies carry more deadlines than most clients: Form 108 and Form 109 each year, accumulation periods that run up to five years, and deemed application that falls due in the next year. Finexo's practice management software lets a CA firm track these dates for each client and remind the team before they pass. It does not compute the 85% test or file the forms for you.

Where this is in the Act

• Section 334: tax on income of a registered non-profit organisation (30% on specified income)
• Section 335: regular income; section 336: taxable regular income and the 85% test
• Section 337: specified income (13 items); section 338: income not included in regular income
• Sections 339 and 340: corpus donation and deemed corpus donation
• Section 341: application of income, deemed application, capital gains as application
• Section 342: accumulated income; section 343: deemed accumulated income
• Sections 347 to 349: books, audit and return; section 351: specified violations and cancellation
• Section 350 and Schedule XVI: permitted modes of investment; section 355(h) and (j): related person and residual income
• Rules 182 to 188 of the Income-tax Rules, 2026: commercial activity gains, related-person benefit, Forms 108, 109, 110, 111, books of account, and audit report in Form 112