TaxSaral

Section 337 · was Sections 11, 12, 13, 115BBC, 115BBI in the 1961 Act

Specified Income — When NPO Funds Are Misused

Section 337 identifies categories of income that lose exemption and are taxed at the Maximum Marginal Rate — primarily when a trust's income benefits trustees, founders, or their relatives personally, or when funds are invested in prohibited modes, or when the trust violates registration conditions.

Who it applies to: Registered NPOs where income is applied for the personal benefit of specified persons (trustees, authors of trust, relatives) or where conditions of registration are violated.

Key points

  • Income is 'specified' (taxable) if it benefits: the author, trustee, founder, or their relatives or associated concerns
  • Interest-free or below-market loans to specified persons make the income taxable
  • Trust property used for private benefit of any specified person renders that income taxable at MMR
  • If SOME income is specified, only that portion is taxable — the rest remains exempt
  • Charitable activity for 'a section of the public' must truly be public — not just for a small private group

Worked example

Trustee Receiving Free Use of Trust Property

A registered charitable trust has regular income of ₹60 lakh. A managing trustee is given use of a trust-owned flat worth ₹25 lakh annual rental value without paying any rent.

Total regular income:                  ₹60,00,000

Specified income (benefit to trustee):
  Rental value of flat given free:     ₹25,00,000
  Tax at MMR (30%):                    ₹ 7,50,000

Remaining income (₹35 lakh):
  Applied to objects (>85%):           → Exempt

Total before cess:                     ₹ 7,50,000
Cess (4%):                             ₹   30,000
Total tax:                             ₹ 7,80,000

Result: The trust pays ₹7.80 lakh because of the trustee's personal benefit. All trustees should pay fair market rent for any trust property they use — even nominal amounts matter legally.

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.