TaxSaral

Section 341 · was Section 11 in the 1961 Act

Application of Income — The 85% Charitable Spending Rule

Section 341 contains the heart of charitable trust exemption: at least 85% of a trust's regular income must be 'applied' (actually spent or incurred) for its charitable or religious objects during the year. Failure to meet this threshold makes the shortfall taxable at MMR.

Who it applies to: All registered NPOs. This is the fundamental compliance requirement every charitable trust must satisfy every financial year.

Key points

  • 85% of regular income must be APPLIED (spent) for charitable/religious objects in the SAME year
  • 'Applied' means actually paid or incurred — amounts payable but not yet paid may qualify if incurred during the year
  • The 15% balance can be accumulated (retained) without tax by filing Form No. 109 (earlier Form 10) before the ITR due date
  • If Form No. 109 is not filed and less than 85% is spent: the shortfall is taxed at MMR
  • Both revenue expenses AND capital expenditure on charitable objects count as 'applied'
  • Voluntary donations given by the trust to other registered NPOs also count as application

Worked example

Trust Just Below the 85% Threshold

Asha Foundation (registered) has regular income of ₹60 lakh in TY 2026-27. It spends ₹49 lakh on programs and ₹3 lakh on admin, retaining ₹8 lakh. It did NOT file Form No. 109.

Regular income:                        ₹60,00,000
85% threshold:                         ₹51,00,000

Actual application:
  Program expenses:                    ₹49,00,000
  Admin expenses:                      ₹ 3,00,000
  Total applied:                       ₹52,00,000  ✓ (86.7% > 85%)

Retained (₹8 lakh) — No Form No. 109 filed:
  Treated as unapplied income
  Tax at MMR:                          ₹ 2,40,000

If Form No. 109 filed on time:
  ₹8L accumulated → Exempt
  Tax:                                 ₹         0

Result: Asha Foundation met the 85% test (86.7%) but still faces ₹2.49 lakh in tax on the ₹8 lakh retained — because it forgot to file Form No. 109. Setting a calendar reminder for Form No. 109 before 31 October every year prevents this.

Related sections

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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.