TaxSaral
Section 342Charitable Trusts & NPOswas Sections 11 & 13 in IT Act 1961

Accumulation of Income — Beyond the 15%

Section 342 allows a registered NPO to accumulate (retain without spending) up to 15% of its regular income without losing exemption. For higher accumulations, the trust must file Form 10 before the ITR due date, specifying the purpose and time period (maximum 5 years). Unspent accumulated income after 5 years becomes taxable.

Who this applies to

Registered NPOs that wish to retain more than 15% of their income for future charitable projects or building reserves.

Key Points

  • Up to 15% of regular income can always be retained — no Form 10 filing needed
  • For more than 15%: file Form 10 BEFORE the ITR due date, specifying purpose and period (max 5 years)
  • Accumulated amounts must be invested only in permitted modes (Section 350) — FDs, govt securities, etc.
  • If not spent within the 5-year period: the unspent accumulated amount is taxed at MMR in Year 6
  • Form 10 must state a specific charitable purpose (e.g., 'to construct a library') — it is not a blank cheque
  • Income accumulated for purchasing a capital asset is also eligible

Worked Example

1

Trust Planning a Major Capital Project

Scenario

Navjeevan Trust (income ₹1 crore in TY 2026-27) plans to build a community hospital costing ₹5 crore over 5 years. It spends ₹88 lakh this year and wants to save ₹12 lakh for the project.

Calculation

Regular income:                        ₹1,00,00,000
Applied to current activities:         ₹  88,00,000  (88% > 85%) ✓
Wanted to accumulate:                  ₹  12,00,000

Automatic 15% retention allowed:       ₹  15,00,000
Since ₹12L < ₹15L → Form 10 NOT needed

Alternative scenario (accumulating ₹20L):
  Automatic limit:                     ₹  15,00,000
  Additional requiring Form 10:        ₹   5,00,000
  Form 10 must state:
    Purpose: Community hospital construction
    Period: 5 years (by TY 2031-32)
  Invested in: Nationalised bank FD

Result

Filing Form 10 each year allows the trust to systematically build towards ₹5 crore over 5 years without any tax. Failure to spend by TY 2031-32 would make the unspent amount taxable at MMR with interest.

Related Sections

Section 341Application of Income — The 85% Charitable Spending Rule
Section 350Permitted Modes of Investment for Charitable Trusts
Section 349Filing Income Tax Return for Charitable Organisations
Section 335Regular Income of Registered NPO — The Exemption Provision

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Section references are based on the Income Tax Act 2025 (Tax Year 2026-27). Examples are illustrative — verify with a Chartered Accountant before filing.