TaxSaral

Section 342 · was Sections 11 & 13 in the 1961 Act

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 No. 109 (earlier 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 it 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 No. 109 filing needed
  • For more than 15%: file Form No. 109 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 No. 109 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

Trust Planning a Major Capital Project

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.

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 No. 109 NOT needed

Alternative scenario (accumulating ₹20L):
  Automatic limit:                     ₹  15,00,000
  Additional requiring Form No. 109:   ₹   5,00,000
  Form No. 109 must state:
    Purpose: Community hospital construction
    Period: 5 years (by TY 2031-32)
  Invested in: Nationalised bank FD

Result: Filing Form No. 109 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

Not sure how Section 342 applies to you? Ask a question or browse all sections.

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