TaxSaral

Section 335 · was Sections 11 & 12 in the 1961 Act

Regular Income of Registered NPO — The Exemption Provision

The primary exemption provision for charitable trusts: if at least 85% of the trust's 'regular income' is applied (spent) for charitable or religious objects in the same year, the entire income qualifies for exemption. The remaining 15% can be accumulated and still claimed as exempt if proper Form No. 109 (earlier Form 10) filing is done before the ITR due date.

Who it applies to: All registered NPOs under Section 332 — any income from property held under trust for charitable or religious purposes.

Key points

  • 85% of regular income must be APPLIED (actually spent) for charitable objects in the SAME financial year
  • Regular income includes: donations, grants, fees, interest, rent — any income from trust property
  • The remaining 15% can be accumulated (retained) without losing exemption if Form No. 109 is filed
  • Capital gains on sale of trust assets: exempt only if sale proceeds are reinvested in another capital asset within 1 year before or 3 years after the sale
  • Income applied abroad (outside India) is NOT treated as applied to charitable objects (with narrow exceptions)

Worked example

Education Trust Testing the 85% Rule

Gyan Education Trust (registered) receives ₹1.5 crore in income during TY 2026-27 — ₹1.2 crore in donations and ₹30 lakh in interest. It spends ₹1.32 crore on school operations and accumulates ₹18 lakh.

Total regular income:                  ₹1,50,00,000
85% threshold:                         ₹1,27,50,000

Actual expenditure on objects:         ₹1,32,00,000  ✓ (88% > 85%)

Shortfall from 85%:                    NIL
Entire ₹1.5 crore income:             EXEMPT
Tax liability:                         ₹          0

──── What if they spent only ₹1.20 crore? ────
Shortfall (₹1.27L − ₹1.20L):          ₹   7,50,000
This shortfall becomes TAXABLE at MMR
Tax on shortfall (30%):                ₹   2,25,000

Result: Gyan Trust's actual spending of 88% keeps it fully exempt. Trusts should monitor their application ratio quarterly to avoid a year-end shortfall.

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.